While the broad market is soaring to all-time highs, Roku (ROKU -4.59%) stock has been left behind.
Shares of the streaming distributor fell sharply on its fourth-quarter earnings report in February and have only drifted lower since then, as the company is still unprofitable on the basis of generally accepted accounting principles (GAAP) and the media industry is in a volatile state. Legacy media companies, including Paramount Global, Warner Bros. Discovery, and Disney have made significant cutbacks to push toward profitability.
That's weighed on Roku's performance as it depends on its media and entertainment partners for a significant portion of its ad revenue. Naturally, Roku is a good platform for these services to advertise their programs and reach new subscribers, but the spending cuts have affected Roku as well, and it's one of the reasons the stock has struggled.
Can Roku dig itself out of its recent hole? Let's look at where Roku will be in a year.
Image source: Getty Images.
Roku in 2025
Roku has a number of strengths, and those are only likely to get stronger over the next year. It's the biggest streaming distribution platform in North America, and its audience continues to grow. It now has 81.6 million streaming households using its service, adding 10 million over the past year.
If the company can repeat that over the next year, it will have 91.6 million members over a year from now. Like Netflix, Roku gains leverage with additional users as the marginal cost to service additional subscribers is slim, so the increase in streaming customers should help Roku improve profitability. It's also seen a faster increase in streaming hours over the last year, which grew from 25.1 billion to 30.8 billion, a positive sign for consumption and demand trends. If Roku adds 5.7 billion streaming hours over the next year, that will also help grow its ad inventory, setting it up for continued revenue growth after its revenue rose 19% to $882 million in the first quarter.
The company is also making strides in its product as it rolls out new Roku-branded TVs with features such as Smart Picture Max, which uses AI to optimize brightness and colors, and Backdrops, which will display artwork or photos according to user preferences.
So Roku has some control over its own platform growth and its product rollouts. What the company doesn't control is the state of the digital advertising industry and advertising demand from its streaming partners.
However, there's good news on that front. Many of its streamers are forming partnerships, offering customers the opportunity to bundle services, which should help improve profitability in the industry, and the broader growth of ad-based tiers should benefit Roku, which generally takes 30% of ad inventory from its streaming partners.
Is Roku a buy?
Roku appears to have the components of a thriving business as the leading streaming distribution platform and a scalable business model driven by usage growth.
The streaming sector also continues to enjoy tailwinds from the transition away from cable. Consumers are still cutting the cord, driving new business to platforms like Roku.
Following the recent decline, the stock's valuation looks fair at a price-to-sales ratio of less than 3. While an immediate turnaround seems unlikely, the components are there for Roku stock to move higher over the next year.
Overall digital advertising demand has improved, and that trend should continue as fears of a recession have receded. Interest rates are also expected to come down, which should give Roku stock a boost and make the business environment friendlier.
Finally, there's still a large untapped market in streaming for Roku to capitalize on.
It's up to the company to execute on those opportunities, but Roku should find itself in a better position a year from now, after enduring the worst of a slowdown in the media and entertainment industry.
It could be a long slog for the business to return to health and sustainable profitability, but the stock offers a good buying point at its current price.
