LB Thinking with Brian Dress our Director of research.

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. And today we're talking with Brian Dress, Director of Research at Left Brain, about a stock. Well, it's been in Left Brain's wheelhouse for a while, but where recent earnings and momentum have maybe changed things. You'll find out more in a moment, but if you want to find out all about what they're doing at Left Brain Investment Research, go to leftbrainir.com where you can sign up for the free Jarvis newsletter that brings you the insights of Jarvis, the firm's proprietary research system. And oh, by the way, they're on Twitter @leftbrainir. Brian Dress, great to chat with you again.

Hi Chuck, great to be back with you and the Left Brain listeners.

We're talking about a stock that if we had talked about it a while ago, it would have been that classic potential to double in 2 to 3 years. Everybody was jumping on it. Now we've got earnings stalling a little bit and the momentum has slowed. So I'm really curious to know what you're going to tell the left-brain thinkers about what you're doing. The stock is Roku. Class A trades by its name, ROKU, Roku. So how do you deal with a stock that it's been a fave, you love it, and then you watch things happen?

Yeah, Chuck, it's a really good question. Roku was our stock of the year for 2020. It did really well in that year. It was one of the main beneficiaries of the pandemic. We still really like the business. For us, earnings season is the most important part of the year, and that's why we pay so much attention to earnings season and earnings reports. That's where we get to learn as much as we can about the underlying business, and that really informs our investment decisions. When we see an earnings report where results are mixed, we really have to look a little bit further into the future and determine whether we want to stick with the stock or not. If you were invested in Amazon for the last 20 years, you would have had a number of drawdowns in the 50 to 70% range, and you could have easily stepped out of that stock and you would have missed a lot of gains. And so that's something that we keep in mind here. So what we're really looking for is, did the business model change? In our opinion at Roku, the business model didn't change, and pretty much we think the prospects are, are looking good in the medium to long term, but there are going to be some near-term hiccups. And I would definitely contrast this with a couple of stocks that also had not so favorable earnings reports, and that's Peloton and Zillow. Right there we saw some changes in the business model, and we were really concerned that going forward results won't be good. That's not what we're seeing with Roku.

So help us understand the difference, because what you're really saying, as I hear it, is there's good momentum that we want to ride, and then there's bad momentum that we basically want to get what we can and be gone.

Yeah, that's true. I mean, we say this all the time, there's really two reasons that we'll sell stock. The first is we see a better opportunity somewhere, and the second is we see that the story is falling apart, the thesis is changing. And so we got to look deeper into the numbers, we got to listen to what management is saying and determine whether we're looking at a broken story here. We definitely don't see that with Roku. We think really a lot of the, a lot of the issues at Roku are temporary. For instance, last quarter, total TV sales were down 31% and TV prices were up 42%. And that's really due to a lot of the supply chain issues that we're hearing from all corners of the economy. So that led to a slowdown in account growth and it also led to lower guidance in Q4. And this is a business that of course sells the, the TV players that people use for streaming. But what we really like about this business is the platform side of the business where they sell ads through the Roku platform. And so reading through into Q4, there's definitely a concern because a lot of the companies that buy ads on Roku are facing the same supply chain challenges. And so their sales might be down in Q4 and that will have a knock-on effect for Roku and their ad sales. But we think this is definitely a temporary phenomenon. And so looking through, we think long-term, this is a business with a great CEO in Anthony Wood. A great model with a very sticky platform. You know, we feel really good about the business going forward after the next few quarters.

How do you decide this is a business I want to ride with versus this is a business I want to add to, or are they one and the same? In other words, if Roku takes enough of a step back, does that basically mean that unless it's too much of somebody's portfolio, you are buying the dip?

Yeah, that's a good point. You know, it really does depend on your positioning. If you're holding 6, 8, 10% of your portfolio in Roku it's really hard to make the case that you need to add exposure. But, you know, at the same time, we know there are a lot of investors who followed the story over the last couple of years, maybe found it difficult to step in because the valuation seemed stretched. And then in this case, this is finally an opportunity to add exposure if you were underweight the stock.

Is there anything going forward if we don't see Roku stem the tide here, if we get another earnings report? Is that what you're waiting for, for sort of the next signal that, that If something's gonna change your mind, that's what it's gonna have to be, something that shows up in the next earnings report?

That's exactly right. So we have kind of a, I wouldn't say a rule around here, but we definitely look at it like this. If we see 2 or 3 bad quarters in a row, you know, we really start asking more questions, digging more deeply. You know, in this case, the first thing we'd be looking for is, you know, the supply chain challenges pushing forward into multiple quarters. Again, I think we would consider that a temporary issue. I think the other concern that we're looking at, and I think a lot of other investors are considering, is that there are potential competitors in Google and Amazon that have similar products in the marketplace that are further behind in the growth curve here. I guess that's what we would be looking for in terms of the long term. If Google and Amazon really start taking share away from Roku, I think that would change the story for us. But from our point of view now, we think Roku continues to be a leader here. We think the platform is superior to those other businesses and it's a pure play. And we really like the business here. And this is the main reason. 42% of TV in the U.S. is streaming now, but just 22% of ad spend is on the streaming platforms. So that means there's a ton of room for growth for Roku. And even if there are other competitors in the business, the pie should be growing. And we also see the iOS changes that have been made in the Apple iTunes Store have really disadvantaged advertising through social platforms, and all that stuff's moving over to that connected TV space, which Roku is the leader. So we think there's some secular stories here that really put the wind at Roku's back.

It's Roku, a really interesting story. And, and again, I love the the nuances of what it is and when it is that you're adding or buying and what it is that you're moving away from. Brian, thanks so much for joining me.

Thanks, Chuck. It's been great to be here again.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations, but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn all about my hour-long weekday podcast at moneylifeshow.com or find us on your favorite podcast app. Thanks to my guest, Brian Dress, Director of Research at Left Brain Investment Research. Learn more about the firm at leftbrainir.com, where you can sign up for the new free weekly Jarvis newsletter highlighting the insights gained from the outputs of Jarvis, the firm's proprietary research system. And if you want to look into Left Brain's new mutual fund, details are available at leftbrainfunds.com. The firm's on Twitter too. @leftbrainir. Left Brain Thinking is available every other Wednesday. Subscribe via your favorite podcast app, and until we don our left brain thinking caps again, happy investing.