Netflixnow one of the world’s largest technology companies, is the gold standard of the streaming industry. Although many competitors have joined the fray, Roku(NASDAQ: ROKU) remains one of the oldest players in this space, with ties to Netflix’s early years in streaming.
Roku has rewarded shareholders lucratively from its initial public offering (IPO) through 2021, but has lost 85% of its value since the peak of the 2021 stock bubble. Could buying the stock position investors for a remarkable comeback story and give them prepare for life? Or is the stock’s decline a permanent loss, a warning to potential investors to stay away?
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Here’s what you need to know.
Most consumers recognize Roku for its Roku-branded streaming dongles, speakers, and streaming televisions. However, Roku is selling its hardware at a loss, which investors should see as bait to get users into its ecosystem. Roku’s core business is its software platform, which you use when you stream content on a Roku device, Roku TV, or third-party TV using Roku’s licensed operating system. Roku generates platform revenue from advertising and fees to third-party partners (such as streaming services).
It’s a bit complicated, but the simple point is this: Roku wants to be the gatekeeper for the streaming viewer. The idea is to take advantage of streaming no matter what you’re watching, as long as it’s on a Roku device.
This kind of middle role involves competition from both sides. Roku competes with other TV manufacturers, and its internal streaming service, The Roku Channel, competes for attention with other streaming services. For example, Roku and (HBO) Max have partnered so that Roku users can access Max. There is an underlying competition, however, as Max and Roku would rather you watch their respective streaming service over the other.
I suspect the market has become wary of this competitive dynamic, which could help explain why Roku stock is trading near its lowest valuation since going public (more on that later).
But what is indisputable is that Roku has continued to grow; the user base reached 85.5 million households in the third quarter. It’s not as big as the leading streaming services (Netflix has nearly 283 million paid subscribers), but it’s big enough to create leverage as streamers feel the need to work with Roku.
Roku may be in its best competitive position ever thanks to its ever-expanding user base. The company is not yet profitable under Generally Accepted Accounting Principles (GAAP), but it generates free cash flow and has $2.1 billion in cash and zero debt on the balance sheet. Yet the stock trades near the lowest price-to-sales (P/S) ratio as a publicly traded company, at just 2.5 times sales.
It may sound strange to say it out loud, but Wall Street seems to have trust issues with Roku’s business model. For example, investors sold Roku stock after the company’s third-quarter earnings, partly due to management’s announcement that it would stop reporting the number of streaming households or average revenue per user (ARPU). However, management’s explanation made perfect sense. The company’s international expansion adds streaming users that Roku has not yet monetized, which skews the data. Instead, Roku will focus on streaming hours (measuring platform engagement) and free cash flow (a key financial metric that drives business value).
Roku’s shares recently fell again after adtech business The Trade Bureau announced that it would launch a smart TV operating system in 2025 that would compete directly with Roku’s. It’s worth remembering that Roku already has 85.5 million households using it, compared to zero for The Trade Desk. Roku is the best-selling TV operating system in North America and has been a leader in the US market for more than five years. It seems doubtful at best that TV manufacturers, especially those already using Roku’s TV operating system, will flee a known winner for an unproven newcomer.
It appears Wall Street doesn’t want to give Roku any benefit of the doubt, and that’s weighing on the stock today.
Analysts estimate that Roku will end 2024 with revenue of just over $4 billion, up 14% from last year. Estimates are $4.6 billion for 2025, implying 15% annual growth. So Roku is still growing briskly, but probably not fast enough to turn modest amounts into life-changing wealth anytime soon.
But Roku’s valuation is a wild card. The stock’s low valuation is just a fraction of that of Netflix, which trades with a price-to-earnings ratio of more than 10. Should Roku prove itself enough to earn a higher valuation, double-digit revenue growth and valuation expansion would combine can ensure rising returns for investors. to search. Even trading at half of Netflix’s price-to-earnings ratio would require Roku’s stock price to double from current levels.
Will that happen? It’s anyone’s guess. Roku has proven itself enough that it’s an intriguing long-term investment idea with market-beating potential if the company can turn a profit and maintain its growth momentum. Going too far beyond that is probably reaching, so those hoping for a rags-to-riches story may want to look elsewhere.
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Justin Pope has positions in Roku. The Motley Fool holds and recommends positions in Netflix, Roku, and The Trade Desk. The Motley Fool has a disclosure policy.
Could Buying Roku Stock Today Give You a Lifetime? was originally published by The Motley Fool
