1 Growth Stocks Down 88% to Buy Now

With the Federal Reserve set to cut interest rates in the coming weeks, the market remains on edge. Earnings season has been a mixed bag so far, and there is concern about a drop in retail prices.

Streaming company Year (YEAR 2.63%) reported solid results last week, but its stock hasn’t moved much. It’s still down 88% from its highs, but if the company keeps heading in the right direction, its stock won’t be falling forever.

More and more people watch on Roku

One of Roku’s consistently strong metrics is viewer adoption. Roku had 83.6 million subscribers at the end of Q2, up 14% year over year and growing. Streaming hours increased 20% to 31 million. These are key metrics for Roku because they indicate customer interest and engagement.

The standard financial metrics tell a similar story. Revenue was up 14% year over year in the quarter, with platform revenue up 11%, mostly driven by advertising and other third-party partnerships, and devices up 39%. That’s a lot, but devices only account for 15% of total revenue.

The device business is still losing gross, but devices play a special role in Roku’s model. They bring people into the Roku ecosystem, where they count as members and account for streaming hours, which leads to better ad sales and scalability. The ad business accounts for the remaining 85% of sales and has a very high gross margin of 53.4% ​​in Q2.

Maintaining the momentum

Management knows exactly how to leverage its platform to drive sales. It has the best streaming operating system (OS) in the US, Canada, and Mexico, which gives it incredible opportunities to monetize its platform.

Something that executives have been talking about recently is the use of the “home screen.” Every Roku member starts their streaming journey on the home screen, including viewers looking for free content like the Roku Channel and those who have paid subscriptions to networks like Netflix. Roku can still reach premium subscribers with ads on the home screen, and it intends to improve that experience. It is creating more free programming for its sports enthusiasts, even those who watch premium sports content, such as those that provide stats and highlights.

It also uses the home screen to drive engagement on The Roku Channel, where it gets the majority of its ad sales. The Roku Channel was the third most watched channel in Q2, with hours streamed up 75% year over year.

While the device segment is still profitable, Roku is investing in offering better options to attract more viewers. It recently released a high-end collection called the Roku Pro Series, which has been getting rave reviews. These types of products are typically higher-margin items, so they have dual-purpose capabilities. Roku is also expanding its wholesale offerings, such as through Objective stores to expand your reach.

But sales still don’t translate into profits

Roku’s plans to increase profitability were derailed by the pandemic. Profits briefly rebounded, but Roku was unprepared to handle the overwhelming demand and stumbled because it shot up too high to meet it. It’s a story similar to many young, disruptive companies that weren’t prepared for the acceleration brought on by the pandemic. Roku is cutting costs to scale efficiently, and while it’s taken some time, it’s made some impressive progress recently.

It still posted an operating loss in the second quarter, but improved 43% from a year ago. The second quarter was the fourth consecutive quarter of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and positive free cash flow, and management is forecasting $45 million in adjusted EBITDA in the third quarter, a slight year-over-year increase.

Net loss improved from $108 million last year to $34 million this year, and management is forecasting a loss of $50 million in the third quarter. While that’s not positive, it’s a clear improvement.

Is Roku stock a bargain?

Roku shares are trading at 2x their trailing-12-month sales. They continue to grow at double-digit rates and show improving profitability. They have an advantage over their rivals in the device space and have ample room to grow their advertising business.

It won’t become profitable overnight, but if these trends can continue, the stock will eventually catch up to growth. If you have an appetite for risk and a long enough time horizon, Roku stock looks like a buy right now.