Admittedly, speculating on the "best investment" of the decade is next to impossible. Such investments often come from unknown companies and industries, often catching investors by surprise by the time a company hears about it.
Nonetheless, in the universe of known value propositions, it could soon be time for Roku (ROKU -3.08%) stock to realize its potential. It is down 85% from its 2021 high amid its struggles, and with the company consolidating its growth, the right catalyst could finally allow this entertainment stock to catapult back to its all-time highs and beyond.
Why Roku has continued to struggle
Indeed, many investors have likely lost patience with Roku. After making spectacular gains in 2021 that it later lost in the 2022 bear market, Roku stock has struggled to recover.
Investors have sold off the stock as operational losses continue and average revenue per user (ARPU) growth remains flat. In the third quarter of 2024, ARPU was $41.10 over the last 12 months, roughly the same as year-ago levels. Roku cited efforts to increase scale and engagement in international markets as the reason for the stagnation.
Additionally, investors seem to panic every time news of a potential competitor emerges. This happened in 2022 when Walmart acquired Vizio and, more recently, amid rumors The Trade Desk planned to launch its own TV operating system.
Signs of optimism
But here's the thing: Competition is nothing new for Roku. It has long had to compete with tech giants like Google parent Alphabet, Amazon, and Samsung. Despite these threats, Roku became the No. 1-selling platform in the U.S. and other countries with a first-mover advantage, an easy-to-use platform that did not explicitly favor one streaming service, and its fostering of competitive advantages in the advertising space.
Moreover, regardless of market sentiment, Roku has continued to capitalize on a secular transition from cable TV to streaming. That has allowed it to grow consistently in two key areas -- active users and number of hours streamed. As of the end of Q3, its 86 million users increased 13% yearly, while streaming hours rose 20% over the same period to 32 billion.
Furthermore, for all of the worries about flat ARPU growth, its financials continue to improve. In the first nine months of 2024, its revenue of $2.9 billion rose 16% compared to the same time frame in 2023.
Admittedly, amid its $283 million in stock-based compensation costs, operating expenses remain high. Still, the $94 billion net loss in the first three quarters fell from $631 million in the same year-ago period.
Also, Roku claimed $157 million in free cash flow for the trailing 12 months, the fifth straight quarter of positive free cash flow. This minimizes the impact of a net loss brought about by non-cash expenses such as stock-based compensation.
Finally, thanks to its lower stock price, Roku has become a bargain. Indeed, the losses leave it without a price-to-earnings (P/E) ratio. Still, its price-to-sales (P/S) ratio stands at 2.7, a level lower than the S&P 500's average sales multiple of 3.2.
The sales multiple is also a tiny fraction of its 2021 highs when its P/S ratio briefly rose above 30. Thus, if Roku can stoke investor optimism again, the stock holds tremendous potential for multiple expansion.
Investing in Roku stock
In terms of foreseeable potential, Roku could turn out to be the best upcoming investment of the decade.
However, such predictions are highly speculative. Moreover, the ongoing losses and seeming inability to grow its ARPU remain sticking points for many investors.
Nonetheless, the market has long ignored the potential for Roku's gains despite the growing popularity and usage of its platform. It has also prospered despite its heavyweight competition, and the history of its P/S ratio points to massive growth potential if it starts to grow its ARPU significantly.
Considering its user growth and improving financials, investors may want to consider buying Roku stock now before the company shows it can better monetize its platform.
