Media-streaming technology expert Roku (ROKU 0.40%) isn't getting any love from Wall Street. The stock is down 28% year to date, continuing a downtrend that started in the summer of 2021.
Roku's market moves have been so brutal, you'd think it was a company on the verge of bankruptcy. But nothing could be further from the truth.
Roku is thriving with robust sales growth, improving profit margins, and strong cash flow. Furthermore, this incredible growth stock stands at the threshold of an online advertising recovery, and I can't wait to see the next couple of years play out.
Roku is thriving, but Wall Street investors didn't get the memo
The inflation panic of 2022 hit "pause" on Roku's business growth for a while, but the company is back to full-throated gains. The same crisis also undermined Roku's profit margins, and that trend line is also pointing sharply upward now.
Net margins should rise above the breakeven line in the upcoming holiday quarter, at least on a single-quarter basis. From there, I expect continued sales growth and sustainable bottom-line profits in 2025.
ROKU Revenue (TTM) data by YCharts.
But market makers don't seem to care about the positive business trends. Roku's stock fell from $313 to $66 in the chart above, and you already saw the year-to-date drop. Did I mention that the company beat analyst expectations across the board by consistently wide margins all year long? I mean, sometimes you wonder what it would take to sync Roku's limp stock chart with its flourishing business results.
Growth catalysts for the holiday quarter
I can't promise a quick price surge, but I do expect Roku to gain some respect in 2025.
The ongoing fourth quarter will benefit from generous political ad spending in early November, plus the evolution of a fresh ad-buying partnership with The Trade Desk (TTD 2.53%) and a forceful marketing push for Roku's own products and services. This activity is taking place in a stabilizing economy as the U.S. Federal Reserve has started to cut inflation-fighting interest rates. As a result, consumers in America and around the world should have more room for holiday spending.
Those catalyst-making building blocks are obviously good for Roku in a direct sense since the company would benefit from robust smart-TV sales this December.
Roku's advertising opportunity
However, that's not the only positive result -- or even the most important one. Ad buyers have been waiting for a healthier economy so they can get back to promoting their stuff. Naturally, advertising budgets should shrink when people aren't ready to buy what you're selling. On the rebound from a two-year downturn, Roku has established itself as an effective marketing platform where those ad dollars can make a strong impact.
The health of the advertising market is quite important to Roku's top and bottom lines. So I expect Roku's ad sales -- accounted for in its Platforms division -- to deliver strong results in January's fourth-quarter report.
Image source: Getty Images.
Why Roku could be the next Netflix-like opportunity for patient investors
A month ago, Roku CEO Anthony Wood outlined his company's near-term prospects this way: "We remain confident in our ability to grow Platform revenue in 2025 and beyond as we grow ad demand, lean into our Home Screen as the lead-in for TV, and grow Roku-billed subscriptions."
The catalysts I mentioned earlier should be seen as a starting point for long-term growth. This feels a lot like the Qwikster moment for Netflix (NFLX 0.68%) in 2011. Like its former parent company and longtime streaming service partner did before it, Roku is doing everything right, and its stock is falling anyway.
Investors who pounced on Netflix stock after the 2011 price drop have seen a 9,500% return in 13 years. Roku's long-term gains probably won't match that game-changing run, but even a much smaller price increase should have wealth-building results for patient shareholders.
Long story short, Wall Street has underestimated Roku's long-term business prospects. In my eyes, this thrilling growth stock is wildly undervalued and a rock-solid buy right now.
