Roku Stock: A Potential Turnaround in 2025

The S&P 500 just wrapped up another impressive year, underscoring the value of investing in index-based exchange-traded funds (ETFs). While the S&P 500 is commonly seen as a reflection of the overall market, it only tracks a select group of 500 companies out of thousands available. As an average, its performance might not represent the possibilities of individual stocks that could either greatly exceed or fall short of this benchmark.

Roku (ROKU 3.88%) stands out as a prominent player in the streaming industry but has not been included in the S&P 500. In contrast to the broader market's success in 2024, Roku's stock declined by 19%. Although various factors have contributed to the market's negative sentiment towards Roku, many of these concerns appear to be short-term. Looking ahead, there is a viable scenario where Roku's stock could rebound and potentially double in value during 2025.

Understanding Market Concerns for Roku

Despite any struggles, Roku has been successfully expanding its platform recently. The company experienced some slowdowns following a significant surge in growth during the pandemic. However, both its device sales and platform services are currently showing double-digit growth. After starting the year strong, Roku's performance took a downturn, and several factors have contributed to the market's skepticism:

• Walmart announced its acquisition of Roku competitor Vizio, generating concerns in the market. This was made public last February but just finalized recently.
• Roku reported mixed financial results for the fourth quarter of 2023.
• Its average revenue per user remained unchanged over the year.
• The company continues to face substantial losses.
• Ad revenue has been affected by inflationary pressures.

Factors That Could Change Roku's Trajectory

With Walmart's acquisition now finalized, there is little indication that Vizio will significantly challenge Roku's dominant market position. Roku retains its status as the leading streaming platform in the U.S., Canada, and Mexico, having sold more devices in the third quarter than its two closest rivals combined. This positions Roku strongly as it continues to innovate and form new partnerships.

The company has also shown consistent progress towards profitability, achieving five consecutive quarters of positive free cash flow and favorable adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Roku is in a solid financial position; although many Wall Street analysts still do not expect the company to turn a profit this year, management has predicted a narrower net loss in the recent fourth quarter. The increasing number of users, coupled with rising revenues and improving profitability, could eventually lead to greater scale and eventual profits.

Moreover, Roku has significant opportunities to expand into international markets, which is a major focus for the company. This strategy clarifies the stagnation of its average revenue per user (ARPU); Roku is attracting customers in new foreign markets faster than its advertising business can keep pace with this growth.

Potential for Roku Stock's Value to Double

Several key factors could propel Roku's stock higher this year. As the advertising market begins to recover, Roku is well-positioned to benefit from this increase in ad spending, especially given its leading streaming platform. Recently, Roku signed a partnership with The Trade Desk to streamline the ad-buying process, enhancing its advertising appeal while progressing with international expansion.

Roku management has projected a 16% year-over-year increase in sales for the fourth quarter. If this growth continues, Roku could achieve $4.5 billion in trailing twelve-month revenue by this time next year.

If profitability trends upwards and investor confidence strengthens, Roku's price-to-sales ratio could improve as well. Currently, it stands at a low of 2.7, but before the stock's decline last year, it was above 4. With an annualized sales figure of $4.5 billion and a price-to-sales ratio of 4, Roku's market cap could reach $18 billion, marking an increase of nearly 80% from its present value.

Should Roku manage to accelerate its growth or if market sentiment shifts to support a higher valuation, stock prices could feasibly double in the coming twelve months.

While nothing is guaranteed, Roku's disappointing stock performance in 2024 is not rooted in long-term problems. As these short-term setbacks fade, there’s a strong possibility that the market may once again embrace Roku in 2025.

Note: The author has no investment in any stocks mentioned.

Roku, stocks, market