The latest stock market rally hasn't been kind to all businesses out there. Just look at Roku (ROKU 3.72%). Its shares are down 32% just in 2024 (as of April 3).
Zooming out, it's the same story, as the streaming stock has tanked 81% in the past three years. That's a huge disappointment compared to the 21% rise of the Nasdaq Composite Index during the same time.
Now that Roku continues to face extreme investor pessimism, is it time to buy shares? Could the stock crush it for shareholders over the next three years? Let's take a closer look.
Focus on these metrics
Despite the stock's poor performance, Roku is a much stronger business than it was three years ago. Investors can look at some key performance indicators that prove this point.
Roku ended 2023 with 80 million active accounts. That was up 56% from 51.2 million at the end of 2020. Even after the pandemic boost to the streaming industry, the company has done a great job bringing on more users.
Engagement is also superb. In the last 12 months, a whopping 106 billion hours of content were streamed on the Roku platform. This figure showed an 81% increase from three years earlier.
Monetization, as measured by average revenue per user (ARPU), has taken a hit in recent quarters due to a slowdown in the digital ad industry. But 2023's ARPU of $39.92 was significantly better than it was in 2020. In other words, Roku is doing a wonderful job at extracting larger amounts of revenue from its customer base. That's certainly an encouraging sign.
As we look toward the next three years, I believe it's likely that these metrics will continue trending in the right direction. That's because Roku is the top smart TV operating system in North America, a position that should remain the same.
Moreover, there is still a ton of runway for streaming TV to keep stealing viewing time from traditional broadcast and cable sources. According to Nielsen, 62.2% of daily TV viewing time in the U.S. wasn't represented by streaming in the month of February. As major streaming services acquire more sports rights going forward, this could push stubborn households to cut the cord. In fact, there are now more households in the U.S. that have ditched their old cable subscriptions than those that still have them.
Greater convenience, more choices, and a better price point will keep drawing viewers. Roku is set to continue benefiting.
What the market wants
Even though Roku is set to keep growing in the years ahead, I believe investors will be closely scrutinizing the company's ability to generate consistent profitability. This hasn't been the case thus far. The net loss totaled $710 million in 2023.
Consequently, the hope is that as Roku scales up by adding more users and generating more revenue, it could finally achieve positive earnings each and every year. For what it's worth, management expects the company to post positive adjusted EBITDA this year.
Investors might have had no issues owning shares in businesses that regularly lost money when interest rates were low, but that might not be the case over the next few years. In this type of tighter monetary policy environment, Roku shareholders will probably demand a more fiscally responsible company. Viewed in this light, I believe the stock has a solid chance of crushing it for investors if it can produce positive net income.
Shares currently trade at a price-to-sales (P/S) ratio of 2.5. That's about one-third the average valuation over the trailing three-year period. If by 2027, Roku is reporting notable gains with the three key metrics outlined above (active accounts, hours streamed, and ARPU), as well as generating profits, the stock could be a big winner as that P/S multiple expands.
