Here is my best stock to buy for 2021 and beyond
No one would have ever guessed the big payoffs 2020 will bring to investors. While the S&P 500’s year-to-date 14% rise certainly isn’t bad in itself, it has been a particularly good year for tech investors. The tech-rich Nasdaq Composite rose 45%.
With so many tech stocks rising rapidly this year, many of the best companies in the market are now trading at valuations that are difficult to justify. So it may be surprising to hear that my top stock pick is a tech stock that has already climbed over 160% in the past 12 months.
My best stock for 2021 is none other than Roku (NASDAQ: ROKU) – a specialist in TV streaming platforms that you have a good chance of already knowing, at least from a consumer’s point of view. After all, Roku dominates the smart TV operating software market in the United States, with around 38% of the lucrative and rapidly growing space share.
A surface look at Roku may leave you thinking that the action is overpriced. Indeed, stocks are currently trading at almost 30 times sales. It is about the triple Facebookprice / sales ratio of. But a deeper understanding of the fundamental momentum of the business and its huge market opportunity shows why this stock is worth paying for.
First of all, investors should realize that Roku’s revenue is skyrocketing. Total revenue grew 73% year over year in the last quarter. The platform’s revenue, which accounts for 70% of total revenue, has climbed 78% year over year. With such growth, Roku’s price-to-sell ratio can drop quickly, knowing that the stock is trading at 19 times next year’s sales.
It’s important to note that Roku’s astonishing revenue growth is fueled by powerful catalysts. For example, the company’s active accounts, streaming hours and average revenue per user increased by 43%, 54% and 20% year-over-year, respectively, in the third quarter. While some investors might assume these numbers are a big acceleration from pre-pandemic levels, when people weren’t taking refuge in their homes, they are not. Active accounts, streaming hours and average revenue per user in Q4 2019 increased by 36%, 60% and 29% respectively. The point is, Roku has carved out a leadership position for itself in a rapidly growing and resilient market. Its rapid income growth rates are therefore likely to persist. Of course, some deceleration will naturally occur over time. But any deceleration is likely to occur very gradually.
A huge market opportunity
But this is where the story of Roku’s growth becomes even more compelling. As a provider of the dominant Connected Television (CTV) platform, the company participates in all the big tailwinds in the CTV market, whatever they may be. With 46 million active accounts, the Roku platform is essential for any publisher when it comes to reaching mass audiences. Whether the shows attract customers through ad-supported or subscription-based programming, Roku will get a share of the economy.
The TV advertising market, in particular, looks like a huge opportunity for Roku. CTV-based ad spend is expected to total around $ 8 billion this year, with more than $ 50 billion in ad spend still going to traditional television. As sports finally begin to move away from mainstream television to follow the eyes of viewers and bring their full attention to streaming, this expensive content will still have to be ad-supported. It’s just too expensive to go on without. More so, the sports advertising opportunity is too enticing for marketers not to continue chasing it, especially in a more focused, data-driven environment.
Roku has quietly built one of the most valuable advertising platforms of the next decade: OneView. The television-centric advertising platform reaches four out of five households in America. As ad dollars continue to shift from traditional TV to streaming, Roku is well positioned to capture a large chunk of that spending.
A reasonable valuation
Nonetheless, some investors might be hesitant about the valuation of Roku. Even an appraisal of 19 times next year’s sales is quite a bonus. Additionally, Roku is still in investment mode. This means that significant profits could be years away.
Still, I think there are some simple projections that can help illustrate why Roku stock deserves its current valuation. Based on analysts’ average forecast for revenue of $ 2.4 billion in 2021, annual revenue could reach $ 25.5 billion by 2030 if Roku achieves a growth rate annualized average of 30% beyond 2021. Assuming the tech company can achieve a 20% net profit margin on these sales (roughly two-thirds of Facebook’s net profit margin today) and price ratio / earnings of 30, Roku could have a market cap of $ 153 billion in 2030, up from $ 46 billion today.
This projection is undoubtedly simplistic. It could turn out to be far too conservative or even a little aggressive. But given Roku’s huge opportunity to gain traditional TV shares in the US only, and the fact that Roku is just starting to take off internationally, this substantive calculation is enough to get me betting on that. fast growing technology company. – even at its assessment today.
What are the risks ?
As with any individual action, there is no guarantee that an investment in Roku will work. Not only should investors expect wild volatility since this is a growth stock, it is possible that unforeseen challenges arise or the competition turns out to be more formidable than expected. Roku’s competitors are tech giants with deep pockets, including Alphabet, Apple, and Amazon – and they are serious.
But I think Roku’s positioning as an independent platform, along with its leadership in market share, is enough to continue to win favor with content publishers, marketers, and viewers. Roku’s bargaining power with these key stakeholders should continue to improve. In the long run, then, I think today’s Roku stock investors stand a good chance of being handsomely rewarded.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.