Roku has experienced a disappointing performance in the stock market in recent years. Over the past three years, its stock has decreased by 45%, despite the broader market thriving due to artificial intelligence (AI) developments. This decline excludes the substantial drop following its rise during the pandemic.
Despite these challenges, Roku possesses significant strengths and competitive advantages. It remains the largest streaming platform in the U.S., Mexico, and Canada. The company maintained steady growth, reporting a 16% revenue increase in the first quarter, reaching $1.02 billion, and a 17% rise in streaming hours to 35.8 billion, indicating continued growth in both consumption and revenue.
Roku was profitable during the pandemic but faced losses in 2022 due to overexpansion and over-hiring. The company is now aiming for a generally accepted accounting principles (GAAP) operating profit by 2026, which is expected to mark the start of consistent profitability.
In the first quarter, Roku’s operational efficiency improved, as its operating loss narrowed from $72 million to $57.7 million, and its GAAP loss per share improved from $0.35 to $0.19. Despite exceeding estimates and reaffirming guidance, the stock still fell 8.5%, as guidance was slightly below consensus. Nevertheless, the company confirmed its guidance for 2025 and the next year’s operating profit.
Roku has diversified, reducing reliance on media and entertainment advertising, its primary advertising vertical, which exposed vulnerabilities during the economic reopening in 2022. The company has increased streaming subscription revenue and expanded the Roku Channel’s audience, now the second most engaged app on the platform in the U.S., with an 84% year-over-year increase in streaming hours. It is also enhancing content with a new partnership with Major League Baseball for weekly games and new Originals with sponsors like Airbnb and Miller Lite.
Additionally, Roku acquired Frndly TV, a subscription streaming service with over 50 live TV channels, for $185 million. This acquisition will extend Roku’s presence in linear TV and free ad-supported streaming television (FAST) channels. Furthermore, Roku is enhancing its ad platform, enabling small and medium-sized businesses to repurpose social media content on connected TV (CTV), improving cost efficiency for advertisers.
The stock’s future potential remains optimistic despite current losses and underperformance. Roku demonstrates scalability with improved margins and controlled operating costs, allowing for margin expansion with double-digit revenue growth. The Frndly TV acquisition is expected to boost growth in the Roku Channel and other FAST services. Roku’s advertising platform is attractive due to its ability to target viewers with precision similar to social media, combined with the impact of video.
Despite potential macroeconomic challenges, Roku is poised to benefit from user growth and the expansion of ad-based streaming. Continued revenue growth and margin expansion beyond 2026 could significantly increase the stock’s value from its current market cap of around $10 billion.
Jeremy Bowman, author of the original analysis, holds positions in Airbnb and Roku, with The Motley Fool also holding and recommending positions in these companies according to their disclosure policy.
