Top Growth Stock Records 87% Decrease: Ideal Buy Opportunity Available

Top Growth Stock Records 87% Decrease: Ideal Buy Opportunity Available

Year (NASDAQ:ROKU) once redefined streaming for many homes. The high-flying growth stock of 2020 and 2021 has seen its stock price plunge from the pandemic-induced peak, currently sitting 87% below July 2021’s record prices.

If you’re looking for potential bargains at the intersection of technology and consumer services, Roku’s dramatic price drop might catch your eye. Past performance is no guarantee of future results, but this steep discount provides a bargain entry point for those who believe in the company’s fundamentals and long-term strategy.

In my opinion, Roku’s long-term business prospects are stronger than ever. In fact, the stock should appeal to diehard value investors in many ways, although Roku still appeals primarily to growth stock hunters. So let’s take a closer look at Roku’s current market position, financial health, and future prospects to understand whether this decline represents a buying opportunity or a signal to exit.

Is Roku the deal of the day?

I am not joking. Roku looks downright cheap In many ways.

The stock today trades at just 2.7 times sales, or 4.1 times the company’s book value. If you’re looking for significant cash reserves, Roku stock changes hands at 4.6 times its cash equivalents on a spotless balance sheet with zero dollars in long-term debt.

The company is therefore cash rich, debt free and ready to invest heavily in promising ideas and operations. At the same time, the share price would be more appropriate for a slow-growing player in mature sectors like industrial materials or telecommunications services.

Roku’s portfolio is wide open to fund tomorrow’s growth

So far, Roku looks like a low-priced value stock. But that’s not the whole story.

The company also uses many effective levers to support its current and future growth. For example, Roku’s annual research and development (R&D) budget has increased by 90% over the past two years. Sales and marketing costs soared 127% during the same period.

Roku also kept the prices of its products and services stable at a time when most of its competitors were passing on higher expenses to their customers. The resulting combination of stagnant gross margins and a surge in operating expenses pushed the bottom line into negative territory by summer 2022.

Top Growth Stock Records 87% Decrease: Ideal Buy Opportunity Available

ROKU Earnings Chart (TTM)

So you might consider Roku’s declining gross profits to be another type of marketing spend in recent years. The company bore the brunt of rising business expenses while others contributed to the inflation problem with higher prices. Along with these growing R&D and marketing efforts, Roku’s business has expanded amid a global economic downturn.

Roku’s recipe for recession-proofing

Roku ended 2021 with 60 million active accounts and $2.7 billion in revenue for the entire year. Two years later, the collection of accounts had grown to 80 million names and annual sales reached $3.5 billion. Not too bad when you’re stuck in an inflation-induced market slump, right?

Additionally, the pressure on results fades. In February’s fourth-quarter report, Roku’s net numbers increased for the first time since fall 2021. At the same time, annual sales increased 8% year-over-year and streams free cash flow for the full year solidified at $173. million.

In other words, Roku’s growth strategy is paying off, and I can’t wait to see the financial results soar when the global economy finally gets back on its feet.

Media streaming services are taking the entertainment world by storm, and every cord-cutting digital streamer is a potential Roku customer. Despite intense competition from world-class technology companies like Samsung, AmazonAnd Google, Roku has a dominant market share among streaming devices in North America. It is also a major player in Latin America and Western Europe, with a global expansion effort underway.

Roku is my favorite purchase right now

Yet market makers are ignoring Roku’s rich long-term upside potential, distracted by a constantly evolving competitive landscape and the current lack of bottom line profits.

I think this is a big mistake. Roku’s business is performing very well, generating growth where it counts. Negative profits seem painful at first glance, but management has the situation under control and could generate net profits at any time by abandoning this costly growth strategy.

And I hope they don’t do that in the years to come. Untapped long-term market opportunities are too big to ignore. The Roku stock you buy at today’s bargain price stands to make a lot of money as the streaming entertainment industry evolves over the years.

Should you invest $1,000 in Roku right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund holds positions at Alphabet, Amazon and Roku. The Motley Fool holds positions and recommends Alphabet, Amazon and Roku. The Motley Fool has a disclosure policy.

1 Growth Stock Down 87% to Buy Now was originally published by The Motley Fool

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