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Roku’s Powerful Fundamentals Make It a Buy

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Right now, multiple factors indicate Roku’s (NASDAQ:ROKU) business is growing rapidly. And given the company’s status as a potential takeover target, ROKU stock continues to look very appealing.

A purple Roku (ROKU) sign is pictured on a wall in Los Gatos, California.
A purple Roku (ROKU) sign is pictured on a wall in Los Gatos, California.

Source: JHVEPhoto / Shutterstock.com

Investors appear to be buying up shares of bigger, more stable tech stocks. The company’s shares have retreated as a result and created a very good buying opportunity. With its strong recent performance, ROKU stock should generally outperform in this market environment.

A Rapidly Growing Business

In a recent interview, Roku’s vice president of ad revenue and marketing solutions Alison Levin discussed the company’s advertising plans for the year. She said that while Roku anticipated strong upfront ad sales, the company’s actual revenue from ads has already been higher than expected.

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In fact, its “upfront spend commitments” jumped more than 100% year-over-year (YOY). Over 42% of marketers who bought ads during the upfront period were purchasing their first-ever ads on Roku.

In the first quarter, Roku’s overall sales soared 79% YOY and its gross profit jumped 132% YOY.

On another note, as InvestorPlace’s Luke Lango reported in June, The Roku Channel recorded its highest-ever viewership level in May thanks to is new original programming. Meanwhile, Apple (NASDAQ:AAPL) agreed to pay Roku to place Apple+, the software giant’s streaming service, on Roku’s remote controls.

Cumulatively, all of this information indicates a strong growth trend in the company’s sales.

ROKU Stock Is a Potential Takeover Target

In a previous article, I suggested that Apple should buy Roku. Although there’s no evidence Tim Cook is considering that move (shockingly, he hasn’t even called me to discuss the column), another huge company is reportedly contemplating the transaction.

That company is Comcast (NASDAQ:CMCSA), whose cable TV business has been slowly withering like those of its peers. Indeed, according to The Wall Street Journal (WSJ), buying Roku is “on the table” for the cable giant.

Although Comcast reportedly called the WSJ article “pure speculation,” I think any company with a huge amount of cash and a streaming business could — and should — buy Roku. Other than Apple and Comcast, Disney (NYSE:DIS) could be another potential suitor for the company.

Navalier, Lango and Deustche Bank Are Roku Bulls

In June, venerable InvestorPlace contributor Louis Navalier noted that Roku’s average revenue per user has been “consistently on the rise.” He wrote that the streaming operating system was “in a strong position,” and was optimistic about ROKU stock.

Lango has also been consistently bullish on Roku. In his aforementioned June article, he said the company’s original programs are “a hit” and that they could generate “a ton of money” for the company.

Deutsche Bank seems to agree with their sentiments. Last month, it kept its “buy” rating on ROKU stock. Deutsche Bank predicted that the company’s audience would “hold up well” in the second quarter.

ROKU Stock Can Enjoy a Favorable Tech Market

Overall in recent weeks, investors have bought large, established tech names and sold smaller, higher-valued tech stocks. As evidence of that trend, Barron’s noted on July 13 that bigger tech stocks like Apple “all reached intraday highs on the same day.”

Since Roku is quite well-established as a leader in streaming operating systems, ROKU stock should outperform the Nasdaq as long as this trend continues. Combined with its strong growth and leverage in the rapidly-expanding sector, ROKU stock can soar in the long-term.

On the other hand, the company could easily become a takeover target in the short-term. Either way, in light of all these points, investors should buy ROKU stock.

On the date of publication, Larry Ramer held a long position in Roku.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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