3 Reasons Why I've Changed My Tune on Roku Stock

It's been nearly three weeks since Roku (NASDAQ: ROKU) roared to life for investors, skyrocketing 68% on its first day of trading. The run didn't stop there, with the stock more than doubling from its $14 IPO price at its peak the next day. I warned that the set-top streaming-video player pioneer seemed to be topping out on its second day of trading, and it did, with its shares eventually settling down for a stay in the neighborhood of $23. Now I'm changing my tune.

There are a few reasons why I'm feeling more opportunistic than nervous about Roku as a growth stock buy these days. Let's go over a few of them.

1. The stock has already corrected

Roku stock closing in on $30 seemed extreme four weeks ago, but now that it's in the low $20s, the valuation argument -- or at the very least, the overvaluation argument -- is kinder. Roku shares have shed a little more than a quarter of their worth since their post-IPO peak.

The drop isn't going to be a dinner bell for value hunters. Roku's market cap is just north of $2.1 billion, a reasonable five times its trailing revenue if Roku was a profitable, fast-growing freak. But it's not. Roku is losing money, and revenue climbed just 22% last year and 23% through the first half of this year. However, the stock is more than 25% cheaper than it was when it maxed out four weeks ago. No matter how you slice up the valuation, Roku's a better deal now.

2. The bullish analysts are coming

We're hitting that point after an IPO where the underwriters that helped take Roku public will chime in with their stock ratings and price targets. And analysts that handed over shares of Roku to their top clients of Roku at $14 don't necessarily have to be bullish 25 days later with the stock in the low $20s. At the end of the quiet period, there is a greater tendency for those analysts to push an optimistic narrative for broken IPOs, where Wall Street pros are scrambling to bail out their institutional clients.

However, even without that underlying need, many analysts will likely post upbeat perspectives on one of the bigger tech IPOs that didn't flop this year. We'll also start seeing long-term growth targets, expanding the valuation opportunities for Roku if things go just right.

3. The platform's the thing

Most consumers view Roku as a hardware company given the niche dominance of its set-top media players, but it's the platform that's exciting investors. Roku hardware sales have been sluggish, actually falling slightly through the first half of 2017. Roku's 23% top-line growth over that period  came from the platform. There were 15.1 million active accounts on Roku at the end of June, 43% ahead of where it was last summer. Roku is generating average revenue per user of $11.22 -- per year -- up 35% over the past year. We're talking about a buck per month, but that adds up as Roku collects bounties and royalties from members signing up for some online services directly through the platform.

Viewing Roku as a software or platform-driven company opens up more compelling parameters for valuing the stock at a premium. Hardware has tighter constraints, and that's before we factor in a set of cutthroat rivals that happen to be the titans of tech.

Roku has been introducing a lot of new devices for stateside and international customers since last month's IPO. They're hardware, but they're also the thing that gets you to the thing -- which in this case is Roku's more promising platform.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.