Could Buying Roku Stock Today Set You Up for Life?

I'm a huge fan of Roku's (NASDAQ: ROKU) media-streaming platform and a long-time shareholder. The company is poised for tremendous long-term growth and it's a truly global business opportunity. When I'm asked for a stock recommendation, Roku often rolls off my tongue before any other idea, because the stock isn't getting the market love it deserves.

So Roku is a great investment in my eyes. But I wouldn't suggest that loading up on Roku stock today would set you up for life.

Image source: Getty Images.

Roku's incredible upside

I'll start with the bullish argument for buying Roku stock. This is the easy part.

If you live in North America and watch video-streaming services on your TV, you're probably familiar with Roku. According to Comscore, the company serves up a dominant 49% of the video-streaming hours on connected TVs on that continent. Below this massive market presence, Amazon (NASDAQ: AMZN) holds the second-place spot with a 16% time share, and Samsung (OTC: SSNL.F) comes next at 14%. No other brand comes close to double-digit percentages.

The company serves 85.5 million active households, many of which have several Roku devices around the house. The user base is growing at a 13% annual clip, driving revenues 15% higher and boosting gross profits by 30% over the same period. It's a serious growth story.

Roku is also very profitable where it counts. The company reported a third-quarter net loss of $9 million, but also generated $67.6 million of free cash flow in Q3. Bottom-line earnings may be negative, but Roku is a reliable cash machine.

I don't want to bore you with details about the Roku Channel, e-commerce features in the Roku City screensaver, the recent ad-buying integration with The Trade Desk (NASDAQ: TTD), or Roku's international expansion plans. Let's just say that the company has an impressive growth plan with many current and potential catalysts, and that I expect big things from Roku's business growth over the next decade.

What Roku bears are looking at

At the same time, many investors are ignoring Roku's undeniable bull thesis to focus on the company's challenges. Average revenue per user (ARPU) has been flat in recent years, ad sales have suffered amid a sectorwide downturn in the digital advertising market, and I already mentioned Roku's negative bottom-line numbers.

None of these issues are related to permanent flaws in Roku's business model. International user growth comes at the cost of slower ARPU growth, the ad market should get back on its feet now that the inflation crisis is over, and Roku is happy to report pre-tax accounting losses as long as the cash profits are solid.

But it's effective bear fodder anyway. As a result, Roku's stock has fallen 21% in the last year and 60% in three years as of Dec. 5. Shares are changing hands at the bargain-bin valuation of 3.1 times sales (price-to-sales), comparable to slow-growing value stocks. Even electric utility stocks often have a richer P/S valuation than Roku, despite single-digit revenue growth and very limited expansion plans.

Roku's stock is incredibly undervalued and deserves a much higher price. I highly recommend buying some today and holding on for the long haul.

Why I wouldn't "bet the farm" on Roku

However, I'm still not going to put my entire nest egg in Roku stock. This stock accounts for just 4% of my retirement portfolio, and I'm comfortable with that.

This is not just the usual call for diversification. It's also a recognition that Roku keeps proving its worth to a skeptical market, but the stock chart keeps trending downward anyway. I have bought Roku shares on several occasions in recent years, and now I'm willing to wait for a sea change before taking any further action.

Moreover, Roku's stock posted a rare price gain as analyst firm Needham suggested that the company looks like a good buyout target. I'm not convinced that Roku CEO and chair Anthony Wood would accept any acquisition offer at this point, but sudden takeovers have surprised me before.

If that happens, Roku's shareholder returns would be limited to the buyout price. A stock-based deal could put a different stock in your portfolio, but then you might as well buy Roku's future parent company instead. This outcome would be profitable in the short term, but it's not how you build lasting wealth.

Roku stock should be a small part of your investing strategy

To be clear, I would jump on this stock if I didn't already have a reasonable Roku position. But there are limits to how much money I'll put into an overly obstinate stock. In other words, I'm not backing up the truck to the Roku opportunity; I'm keeping my exposure to this single stock rather small. You could always go big if you really want Roku stock to set you up for life -- but then you'll have to accept the risk that market makers will keep overlooking this underrated growth stock.

Don’t miss this second chance at a potentially lucrative opportunity

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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. Anders Bylund has positions in Amazon, Roku, and The Trade Desk. The Motley Fool has positions in and recommends Amazon, Roku, and The Trade Desk. The Motley Fool has a disclosure policy.