There's a timeline in which Roku (ROKU -10.29%) is a winner. The smart TV pioneer is up 77% since the end of 2022. Rattle the perspective and everything changes.
Zoom in: Roku shares tumbled 24% on Friday after posting poorly received fourth-quarter results. Zoom out: The stock has plummeted 85% since peaking three summers ago.
There are plenty of starting lines that have kicked off a long way down for Roku shareholders. The stock and its investors deserve better. Creating a long-term story with a happy ending may seem challenging, but it's not out of the question. Roku is still a five-bagger since going public at $14 less than seven years ago. It may take some time, but Roku still has the potential to pop tenfold from here. Let's play out this new happy ending.
Here comes the rain again
Roku is holding up better than its most recent slide would suggest. It just announced record revenue in its latest quarter, its third consecutive period of double-digit growth. The 15% year-over-year increase it's projecting for the current quarter would stretch its streak of double-digit top-line gains to four financial reports.
The audience is growing and so is the platform's stickiness. Active accounts have risen 14% over the past year with the collective hours spent streaming on Roku climbing 21% in that time.
Roku got tripped up last week because average revenue per user dipped sequentially and year over year. The streaming services stock offered up two explanations. The first excuse -- international expansion -- is not a deal breaker. Roku's making a big push overseas now that it's the leader in the U.S., Canada, and Mexico. Marketers in other countries aren't willing to pay up for viewers the way they do on Roku's home turf.
The second excuse is a bit more problematic. The bears are watching Roku's warnings about cooling media and entertainment promotional spending activity. Several prolific streaming services have launched in recent years, and they spent a lot of money to stand out in the country's leading streaming hub. However, now that they're all cutting costs in an attempt to reverse billions in annual losses, Roku is feeling the pinch. It won't always be that way.
Image source: Getty Images.
Chasing rainbows
The neat thing about a stock being 85% below its all-time high is that it means that Roku would have to be a seven-bagger just to return to its previous high-water mark. It also only helps that Roku is in better shape now than it was in the summer of 2021.
Roku's audience has grown from 55 million to 80 million, 45% larger now. Streaming hours have shot 67% higher. Average revenue per user is only marginally higher -- going from $36.46 to $39.92 on a trailing-four-quarter basis -- but the scalability is there with Roku's expanding reach into living rooms.
It's not a kind comparison everywhere you look. Platform gross margin has contracted sharply over the past two and a half years, and the once-profitable Roku has now rattled off eight straight quarterly losses. However, this does give Roku room for improvement.
The bears are growing these days. Short interest has nearly tripled from where it was when the stock was peaking. Assuming that the connected TV market won't recover and that Roku can't return to profitability can be dangerous to the naysayers. Roku has been pumping a lot of money over the past two deficit-saddled years into original content and new product offerings. The investments have helped Roku pad its lead on the competition. Now that it has a sizable audience, prioritizing return on investment can deliver explosive bottom-line growth.
As a result of its cash-rich balance sheet and slumping share price, Roku's enterprise value is now less than $9 billion. This seems low for the streaming content gatekeeper for 80 million homes spending more than four hours a day on the platform. It will have to do more than just return to profitability to justify a $90 billion enterprise value. Back-to-back quarters of positive nine-figure free cash flow is a good start, but not enough.
Scoring some wins internationally can only help. The return of media and entertainment promotional spending activity would be huge. Analysts don't see a return to reported profitability until 2027, but revenue is also expected to nearly double by then. With its strong balance sheet, Roku's path to becoming a 10x market winner will be long but clear. Don't just zoom out. Zoom ahead.
