If you owned Roku (ROKU -10.29%) stock this past year, you're likely very happy with your recent returns. The streaming video specialist's shares more than doubled in 2023, beating the rallying S&P 500 index by over 100 percentage points.
Wall Street hopes to see further big gains ahead thanks to the powerful combination of accelerating sales growth and Roku's shrinking cost burden. Those are the big-picture trends for investors to know heading into the new fiscal year. But there's more to this growth story than just those headline sales and earnings metrics. Here are three things you need to know before buying Roku stock in 2024.
1. The growth thesis will be put to the test this year
Roku executives have been saying for years that the streaming video market can support excellent returns, even for companies focused on advertising sales. The next few quarters will test that growth thesis.
Roku doesn't rely on subscription fees like Netflix (NFLX -0.63%), instead choosing to build a mostly advertising-fueled business model. That difference translated into very weak revenue and earnings trends as digital advertising spending softened last year. There's hope on the horizon, though.
In early November, Roku said its solid growth in video ad sales significantly outperformed the traditional TV ad market. The company's scale is helping it attract more advertisers, large and small, and the business is also getting a lift from huge partnerships with companies like Spotify. Roku will need to show continued market share gains in its core platform business for the stock to extend its positive momentum deeper into 2024.
2. Roku could return to profitability in 2024
Roku's stock jumped in response to its restructuring plan, announced in September, that aims to slash costs across the business. The company is spending less on content and real estate and is cutting its workforce by about 10%. To date, investors haven't seen a positive financial impact from these changes. In fact, net losses ballooned to over $600 million through the first three quarters of 2023, compared to a $260 million loss a year earlier.
The restructuring moves should be completed by the end of Q4, though, likely pushing Roku back toward profitability this year. It's possible that the streamer will disappoint Wall Street here with only modest improvements. However, with sales growth accelerating and costs falling, there's a good chance investors will see much better earnings results from Roku in 2024.
3. Roku is a pricey stock
The biggest worry for investors considering this stock is its elevated price tag. Roku is valued at nearly 4 times its annual sales, which is expensive, given that the business currently generates so much red ink. Netflix isn't much more expensive at 6 times its annual revenue.
Roku's management team hasn't proven there's a sustainably strong operating model in this approach yet, and they still need to diversify away from their exposure to volatile advertising demand. Look for the company to progress on this score through big partnerships and a push to market more smart home devices in 2024.
Meanwhile, investors can expect volatility around Netflix's late-January earnings announcement. That report will feature a big update on the advertising market and other key industry trends, like content costs.
With its subscription-based selling approach, Netflix has demonstrated it can easily produce operating profits of more than 20% of sales. Investors are hoping to learn this year that Roku is building a similarly strong business by taking an advertising- and hardware-focused approach to the streaming video industry.
