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3 Reasons to Buy This Cathie Wood Growth Stock, and 1 Reason Not to

Motley Fool2021-08-26

Key Points

  • Cathie Wood's ARK Innovation ETF owns $1.2 billion of this growth stock.
  • This beaten-down growth stock is the third-largest holding in the ARK Innovation ETF.
  • The stock is down 25% in the last month and is trading at a forward price-to-sales ratio of 17.

As of this writing,Roku(NASDAQ:ROKU) is the third-largest holding in Cathie Wood's ARK Innovation ETF portfolio of stocks. The popular asset manager's fund holds over 3.2 million shares of the enabler of streaming content. That's a total value of almost $1.2 billion and makes up 5.4% of the portfolio.

Roku's stock price is down 25% in the last month as the market has turned sour on so-called stay-at-home stocks that benefited during the pandemic. However, that could be a buying opportunity for long-term investors.

Let's look at three reasons to buy this Cathie Wood favorite and one reason for caution.

IMAGE SOURCE: GETTY IMAGES.

1. More content is shifting to streaming from linear TV

More and more consumers are switching from linear TV connections to streaming content. Still, there is a long way to go before the transition runs its course. One estimate suggests in 18- to 45-year-olds, only 39% of their TV watching is streaming, highlighting that there is plenty of room for the shift to continue.

2. Roku has a great operating system that customers love

Roku enables this transition by selling hardware (streaming players) that connects TVs to its operating system. Additionally, it works with manufacturers to have its operating system built into TVs. Indeed, Roku is the leading operating system in TVs in the U.S. and Canada, and it's making good progress in Brazil and Mexico. Roku's system is proven to be reliable and reduces costs for manufacturers. Those features have helped Roku attract 55.1 million active accounts, up 28% from last year; a figure that is likely to grow as Roku continues its international expansion.

3. Roku is expanding internationally

The next market Roku will enter is Germany later this year. If Roku can match the success it's achieving in existing markets -- and there is no reason to think it won't -- it can continue to attract new customers. Indeed, the plan from management on international expansion is to keep doing more of the same, since it's working so well. During the second-quarter earnings call earlier this month, founder and CEO Anthony Wood commented:

In terms of growing active accounts globally, the strategy we're using is the same that worked for us well in the U.S., which is to focus on building active accounts, well, in terms of our business model internationally, it's to focus on building active accounts, engaging those users and then monetizing those users. And the way we are building active accounts is through selling our streaming players and licensing our operating system to TV manufacturers and coming to market with Roku TVs. Both of those are working well for us.

A concern? Roku's valuation is not cheap

The one reason to be hesitant about Roku stock right now is that it isn't cheap, despite falling in value by 25% in the last month. It's trading at a forward price-to-sales ratio of 16.73, down from nearly 25 earlier in the year. To be sure, Roku has excellent long-run prospects. However, that might already be priced into the stock at this price. Furthermore, the company has challenges in the near term, such as the negative effects of economic reopenings and supply chain issues, which are causing shortages in materials and harming profit margins.

All things considered, it may be prudent for investors to wait for an additional pullback in the stock price before accumulating shares in Roku. Or you could wait for supply chain issues and financial impacts from economic reopenings to play out before buying Roku stock.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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Comment17

  • Eskay_Tew
    ·2021-08-31
    Higher to highest 
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  • LuluDog
    ·2021-08-27
    Hahaha 
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  • Albaakbert
    ·2021-08-27
    Buy buy 
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  • andrew123
    ·2021-08-27
    Like n comment
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    • Albaakbert
      [Miser][Happy]
      2021-08-27
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    • Miracle99
      Done
      2021-08-27
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  • HH浩
    ·2021-08-27
    Growth stock is never cheap especially when there is so much liquidity. Pls like and comment. 
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    • koolgal
      Well said??
      2021-08-28
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    • andrew123
      agree.like yr u like back
      2021-08-27
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    • HH浩
      Thanks
      2021-08-27
      Reply
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  • Maybl
    ·2021-08-27
    Good
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  • MarkN
    ·2021-08-27
    Like
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    • andrew123
      done. like back
      2021-08-27
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  • SPOT_ON
    ·2021-08-27
    Like n follow 
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    • HH浩
      Reciprocate
      2021-08-27
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  • RuyiOng
    ·2021-08-26
    sure
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    • MarkN
      yeah
      2021-08-27
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  • Anni001
    ·2021-08-26
    Please help likeThanks 
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    • Attica88
      ok
      2021-08-26
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    • RuyiOng
      OK
      2021-08-26
      Reply
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  • rachellll
    ·2021-08-26
    ?
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  • Babypegasus
    ·2021-08-26
    Like and comment! 
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  • weiren88
    ·2021-08-26
    OK
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  • ImMillionare
    ·2021-08-26
    thanks for the information 
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  • lee1234
    ·2021-08-26
    Like
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    • andrew123
      done.like back
      2021-08-27
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  • kqueen
    ·2021-08-26
    Pls like ty
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    • weiren88
      ok
      2021-08-26
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  • 宙斯的爱子
    ·2021-08-26
    Cool
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    • FH2451
      wait
      2021-08-27
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    • woonws
      This seems to apply to many other stocks too... good fundamentals or potential but super high valuation...
      2021-08-26
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    • CasperC
      ok
      2021-08-26
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