Obsessively focusing on the short term is a favorite pastime on Wall Street, but it's not a great strategy for achieving market-beating returns in the long run. One of your key advantages as an investor is the ability to ignore the daily or quarterly fluctuations that drive financial headlines while instead following a company's enduring competitive assets.
That advantage gets bigger when you stretch your investing timeline into at least several years. A tech-focused growth business like Roku (ROKU -10.29%), for example, will certainly look much different in five years than it does today. Let's see what investors can expect from the streaming platform by then.
More diversity
For those not already familiar, Roku makes digital media players for video streaming and operates a video-on-demand service. The latter business is highly dependent on advertising -- a factor that drove declining sales through early 2023. However, that business is looking up lately. "We are well positioned to reaccelerate growth as the ad market recovers," management told investors in late July.
Meanwhile, the company is likely to be much less dependent on advertising in five years. Roku's executives know that a strong business doesn't rely on just one revenue source, especially when that source is largely outside of their control. That's why Roku is doing its best to maximize other revenue streams like premium subscriptions and hardware sales.
Look for the company to continue aggressively targeting these complementary services into the late 2020s.
Higher return on investment
One of the most exciting aspects of Roku's business model is the potential for the platform to significantly boost its value over time. The clearest example today is with respect to advertisers, which are being offered innovative ways to connect with consumers that aren't possible through traditional pay-TV models. Investors can expect to see more partnerships like the recent one with Shopify that allows for purchases directly from a streaming advertisement.
Roku also needs to boost the value of its service for its two other main stakeholder groups: users and content distributors. Engagement is the metric that supports both goals, and the good news is that these trends are pointed in the right direction. Roku gained 1.9 million new accounts in the most recent quarter, pushing its total to 74 million. Streaming hours were up more than 20% year over year to 25 billion.
The missing piece is profit
Roku hasn't yet demonstrated a clear path toward sustainable profits. Average revenue per user was down 7% in the most recent quarter as it struggled to monetize its growing base of TV watchers. Its net loss has expanded to $300 million over the past six months from $140 million a year earlier. Operating losses have followed the same negative trajectory.
ROKU operating margin (TTM) data by YCharts; TTM = trailing 12 months.
The path that Roku's stock takes over the next few years might depend most directly on the company's ability to improve this core earnings metric. That's partly why investors pushed shares higher this year after learning of the company's aggressive cost-cutting that will include layoffs, a review of content spending, and lower real estate spending.
Streaming leader Netflix enjoys an operating profit margin of roughly 20% of sales, while Roku's comparable metric is in deeply negative territory today. It lacks Netflix's scale and its direct connection with paying users. Nearly 240 million people subscribe to Netflix, while Roku counts 75 million users, most of whom do not pay for access to its content.
Roku has several promising paths toward boosting its profit margin over the next few years, but investors will need to see concrete progress on this score for the stock to extend its 2023 wins into market-thumping returns over the long term.
