Shares of Roku (ROKU 6.42%) have been incredibly disappointing for investors over the past few years. After capturing attention and soaring early in the pandemic, it has landed with a loud thump and remains 86% off its highs.
At the current price, is Roku a bargain? Let's see where it could be next year and whether or not it's worth your investing dollars right now.
What's going right
Roku has carved out a niche as the top streaming operating system in the U.S. and a major player in ad-supported streaming, even up against the likes of Amazon, Netflix, and Disney. It consistently reports strong growth in sales and other measures of its business.
In the 2024 first quarter, revenue increased 19% year over year, supported by growth in both its device and platform segments. The device business is the hardware it sells to consumers to allow streaming on various types of screens. This is its operating system, and every customer who buys a device gets an account with Roku and access to its free channels.
The platform business is mostly advertisements on the ad-supported channels, but viewers also have access to any premium streaming networks they pay for to watch through Roku devices. The company collects a small slice of subscription fees if the viewer signs up for the subscription on the Roku platform.
Aside from standard growth metrics like member count and revenue, Roku gauges its success by several other important measures. Streaming hours increased 23% year over year in the first quarter, and they also increased sequentially.
This is crucial for growing its advertising business, which is by far its larger segment, accounting for 85% of total revenue in the first quarter. The more hours its viewers stream, the more ad hours it has to fill, and the more attractive it looks to advertisers.
Trends are moving in its direction. Overall broadcast-TV viewing hours fell 13% in the first quarter, according to Nielsen, while average daily streaming hours per Roku household increased from 3.9 to 4.2.
Another area where it shines is in product development. It has climbed to the No. 1 position due to the broad array of devices it offers as well as its focus on features. It recently rolled out a new collection of devices that uses artificial intelligence to optimize picture and audio quality, providing an improved experience for viewers.
A year from now, Roku should have more members, more revenue, and more streaming hours. And the company will probably be bringing out or developing upgraded technology to maintain its lead in the industry.
What's going wrong
The main issue for Roku right now is that it's struggling to get back to profitability. It briefly became profitable, ahead of schedule, when demand soared in the early days of the pandemic. But it didn't maintain that bottom-line boost, and the road there seems long.
There are signs of improvement, though. Gross profit increased 15% year over year in the first quarter, and free cash flow and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were both positive for the third consecutive quarter. That implies a sustained improvement, which means it should continue to stay stable by this time next year, and hopefully improve. But it's unlikely to be net profitable. Wall Street analysts expect a $1.81 loss per share for 2024 and a $1.19 loss in 2025.
While Roku has some problems, there have been external triggers leading to its fall this year. The stock tanked after Walmart announced the acquisition of one of its rivals, and Roku's share price hasn't recovered. Without that impact, the stock could cover some of its losses over the next 12 months. It's down about 30% since that announcement.
How long will it take?
Roku has an amazing business with strong long-term growth drivers, and it looks like the future of streaming, which itself is the future of home viewing. But despite its high growth, the stock keeps plummeting.
The situation won't be fixed next year, because the company is unlikely to be profitable. But if it demonstrates enough progress, the stock should begin to climb.
I recommend buying Roku stock if you have a long-term horizon, but since it's unclear when it will finally rebound, I would take a small position right now.
