Despite the massive pullback it experienced last year, streaming specialist Roku (ROKU 5.41%) has comfortably beaten the market since its late 2017 IPO. However, the company is facing several issues, some of which could hinder its long-term prospects. At the same time, there are still opportunities for grabs in the streaming market, so Roku could still have a runway for growth.
But could it help investors become millionaires by, say, retirement? Let's look more closely at the company to answer that question.
What it would take
Generating massive amounts of wealth on the stock market takes time. So let's suppose an investor is 20 years away from retirement. An investment of $10,000 would turn into $200,000 -- or a meaningful 20% of the desired total -- in 20 years if it can record a compound annual growth rate (CAGR) of 16.2% through the period.
Roku could certainly be said to have helped an investor become a millionaire if it can pull that off. So let's restate our question as follows: Can the tech company grow at a CAGR of 16.2%, or nearly three times that of the S&P 500 since 1928, in the next couple of decades?
How is Roku's business performing?
The bulk of Roku's money comes from its platform segment, which records advertising revenue and related sales; for instance, it charges streaming services that wish to have branded channel buttons on its remote controls. The company also generates revenue from its namesake Roku players. The streaming specialist has generally grown its revenue rapidly, but that changed last year as businesses decreased their advertising spending, thereby affecting Roku's results.
While the company also dealt with higher costs that made it more expensive to bring its devices to the market, it chose to absorb these costs and shield consumers from them, which did no favors to its profit, or lack thereof. For fiscal 2022, Roku's revenue jumped by about 13% year over year to $3.1 billion.
ROKU Revenue (Annual YoY Growth) data by YCharts
Also, the company's net earnings per share of $1.71 in 2021 turned into a net loss of $3.62 this time. While these results were far from impressive, there are reasons to be optimistic.
The massive streaming opportunity
Roku ended 2022 with 70 million active accounts, representing a 16% increase from 2021. However, Roku's player revenue declined by 17% year over year to $415.1 million last year. That's even though the company didn't raise these devices' prices. If it had done so, it might have sold even fewer streaming players, leading to fewer active accounts.
This highlights why the company chose not to increase the cost of its streaming devices. Growing the number of people within its ecosystem could be far more valuable in the long run than the money it would generate from increasing the prices to match the higher costs associated with its Roku players. Here's what's most important for the company.
The more people Roku keeps glued to their screens, the more attractive to advertisers its platform becomes. And, of course, spending on advertising will pick back up once economic challenges subside. Roku estimates that most advertisers are still targeting linear television even though streaming is slowly but surely becoming the dominant mode of watching TV.
But how long before this industry entirely takes over? Streaming accounted for 38.1% of total television viewing time in January in the U.S., compared with 28.9% in the same month of 2022. So even in the U.S., it represents far less of 50% of the total viewing time, meaning there's plenty of room to grow in one of the countries where the industry is most penetrated. The worldwide opportunity remains massive for Roku.
The company's playbook will look much like what has made it successful thus far: Grow its active accounts and streaming hours and attract an increasingly larger advertising market share. That will lead to consistently higher revenue for the company, with higher growth rates once the economy fully recovers, which might not happen this year. But what about the bottom line?
Notice that as its ecosystem grows and platform revenue increases, Roku's player revenue, which generates much lower margins, will make up an increasingly lower percentage of its total. That will help boost margin and profit over the long run. Furthermore, easing economic challenges -- that is, cooling inflation and relaxing supply chain issues -- should also help address the high expenses it has had to deal with recently and still has to contend with.
The company put it best when it said the following in its latest letter to shareholders:
While cyclical economic pressures are affecting our business, two things remain true: The secular trend supporting our business remains intact, and the combination of our scale, engagement, and innovation position Roku exceptionally well to benefit when the market rebounds.
The verdict
My view is that Roku will deliver market-beating returns in the next decade and beyond. But whether it can generate the kinds of returns outlined here is less certain. If I were a betting man, my money would be on "no." That is, I don't think Roku will achieve a CAGR of 16.2% in the next two decades.
But I'd still invest that same money in the company's shares. Because even if it falls short of that goal, I'd still like to go along for what promises to be an exciting ride.
