It's been a rough few years for Roku (ROKU -10.29%). The leading streaming distribution platform was a darling during the pandemic, but the stock has fallen hard since then. What seemed like a mounting comeback fell apart last month as Roku shares suffered a one-two punch after it gave disappointing guidance. Then Walmart said it would acquire TV-set maker Vizio in what looks like a play for the digital ad market from the retail giant.
After that pullback, Roku is still trading down more than 80% from its pandemic-era peak, but that sell-off also offers a good price for a stock that still has disruptive potential. Keep reading to see why holding your nose and hitting the buy button on Roku could pay off down the road.
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There's still a huge growth opportunity
There's a lot of noise in Roku's results these days. The company sells its gadgets near cost and makes most of its money from advertising and other revenue sharing from its streaming partners.
The digital advertising market took a hit in 2022 as businesses cut ad spend in anticipation of a recession. As a result, Roku's revenue growth ground to a halt, and it reported wide losses as the company had ramped up spending following its pandemic.
Since then, Roku has cut costs through several rounds of layoffs, and revenue has returned to growth as the recession never materialized.
However, the business still isn't performing to its full potential. Its biggest advertising vertical, media and entertainment, is struggling as many of its legacy media streaming partners, including Walt Disney, Warner Bros. Discovery, and Paramount Global, have faced more challenges than they expected in their transition to streaming.
Those companies should eventually find the right balance of spending and pricing to make their streaming services work, and it's clear that there's ample demand for streaming as audiences and advertisers continue to move over from traditional TV.
At the same time, Roku should begin to benefit from the growth of Connected TV and the increase in signups for new ad-based tiers on platforms such as Netflix, Disney, Amazon Prime Video, and others, which should propel its revenue higher as Roku typically takes 30% of advertising inventory from its streaming partners. The upcoming joint sports streaming service from Disney, Warner Bros. Discovery, and Fox, and the ESPN flagship service should also drive new business toward Roku.
Roku now has 80 million active accounts and is still growing briskly, up 14% over the past year, and the company continues to expand outside the United States. It's now the No. 1 TV OS in Canada and Mexico. It's also growing in Central America and the U.K.
Roku's path to 10x returns
The challenge for Roku over the coming years is monetizing its installed base of 80 million accounts, growing its user base, and expanding its margins. Streaming prices continue to rise, which should make it easier for Roku to grow its average revenue per user from $40 a year currently, and there's still plenty of room for growth globally as the entertainment industry transitions from traditional TV to streaming.
If Roku can double its average revenue per user and double its user base over the next five to 10 years, its revenue will reach $14 billion, up from $3.5 billion currently, and margin should improve as the business scales up as well. Given the margins of large social media and digital advertising platforms, it's not unreasonable for Roku to generate $2 billion in net income on $14 billion in revenue down the road.
To be a 10-bagger from here, Roku would also need a price-to-earnings ratio of around 45 to 50, giving it a market capitalization of $90 billion to $100 billion, which also seems achievable given that it's the market leader in a growing industry. Getting there will take time and an improvement in the advertising environment, but there's clearly an opportunity for Roku stock to deliver multibagger returns from here.
