Roku Inc (NASDAQ: ROKU) is one of the best examples of small-cap stocks that have the capacity to generate big gains for investors. These types of aggressively growing small-cap stocks offer two profitable scenarios to investors: they could be acquired by a large competitor at a heavy premium or these small-cap stocks expand their growth rate as a standalone company.
Why Roku is a good stock to buy? Roku has been impressing market participants amid its aggressive growth strategies and revenue expansion. Its revenue enlarged 45% in fiscal 2018 to $742 million compared to revenue of $512 million in the previous year.
Revenue growth remains the essential factor for small-cap growth stocks; the growth rate indicates demand from end users along with the effectiveness of business model and business expansion strategies. Roku’s business model of providing a streaming platform for television continues to gain market share from competitors like Comcast. The company is operating through two business segments: Player and Platform.
Roku CEO has presented a bright financial and operational outlook in a letter to shareholders. He said, “2018 was an excellent year for Roku, with record results and solid progress towards our long-term vision of powering every TV in the world. Roku added nearly 8 million active accounts in 2018, increasing our total active accounts to more than 27 million at year-end. We estimate that nearly 1 in 5 U.S. TV households now use the Roku platform to stream at least a portion of their TV viewing.”
The company expects its revenue to grow at a similar pace in fiscal 2019. Its revenue could reach $1 billion level this year, thanks to its business strategy of scaling the number of households using the Roku platform and increasing monetization per user.
In addition, Roku has also been showing solid growth in its gross margins. Its fiscal 2018 gross margin grew to 86% from the previous year. The gross margin expansion shows that the company is selling its products and services at a premium compared to the cost of production.
After experiencing some volatility during the final quarter of last year, Roku shares grew 62% since the start of this year. Its share price is gaining investor’s confidence amid the substantial growth in revenues and active accounts. Moreover, some analysts and traders see Roku as s the likeliest M&A target in the Internet sector. Therefore, buying and holding this small-cap growth stocks could offer big returns to investors.