There's no question that Roku (ROKU +2.43%) has been a disappointing stock to own in recent years.
Over the last three years, the stock is down 45% even as the broad market has surged from artificial intelligence (AI)-driven tailwinds. That sell-off in Roku doesn't even include the bulk of the crash after the stock soared during the pandemic.
Despite the stock's woes, there are evident strengths and competitive advantages in the business. It's the biggest streaming platform in the U.S., Mexico, and Canada, and the company continues to deliver steady growth, recently wrapping up a first quarter that included 16% revenue growth to $1.02 billion as streaming hours rose 17% to 35.8 billion, showing both consumption and revenue continuing to grow.
Though Roku was profitable during the pandemic, it sunk to a loss in 2022 as it overexpanded and over-hired during the growth period. However, the company is now targeting a generally accepted accounting principles (GAAP) operating profit in 2026, which should be the beginning of consistent profitability for the streaming stock.
In addition to the solid revenue growth in the first quarter, Roku's business is demonstrating scale as its operating loss narrowed from $72 million to $57.7 million and its GAAP loss per share improved from $0.35 to $0.19.
Despite edging out estimates on the top and bottom lines and reaffirming guidance, the stock still fell 8.5% as guidance was slightly below the consensus. However, the company reaffirmed its guidance for 2025, as well as next year's operating profit.
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Is Roku finally turning the corner?
Roku has evolved in recent years as the company has diversified away from its dependence on media and entertainment (M&E) advertising, its biggest advertising vertical and one that exposed its vulnerability when the streaming industry ran into a wall in 2022 during the economic reopening.
The company has built up its streaming subscription revenue and it's grown the Roku Channel's audience, which is now the No. 2 app in the platform in the U.S. by engagement with streaming hours up 84% year over year. It's also expanding its content on the Roku Channel with a new partnership with Major League Baseball for a weekly game each Sunday and new Originals, teaming up with sponsors like Airbnb and Miller Lite.
The streaming platform also made an intriguing acquisition in the quarter, buying Frndly TV, a subscription streaming service with over 50 live TV channels like the Hallmark Channel, A&E, and the History Channel, for $185 million. Frndly will expand Roku's reach in linear TV and livestreaming free ad-supported streaming television (FAST) channels, which CEO Anthony Wood described as a growth category.
Additionally, the company is improving its ad platform and now allows small and medium-sized businesses to easily reuse social media content on connected TV (CTV). One advertiser that used the tool, which is called Spaceback, lowered its cost per site visit by 76% compared to CTV ads on non-Roku platforms.
NASDAQ: ROKU
Key Data Points
Why the stock still has plenty of upside potential
While the ongoing losses and poor stock performance are frustrating, there are a number of emerging tailwinds in the business.
First, the company is demonstrating scalability as its margins have improved over the last several quarters. It's controlling operating costs as well, which should allow margins to expand as long as it can grow revenue by double digits. Roku is also seeing strong growth in the Roku Channel and with other FAST services, which the Frndly TV acquisition should boost. Finally, the company is an attractive advertising platform as it can target viewers with a similar precision to social media but with the impact of video.
The macro environment could add noise to the company's path to profitability, but Roku will benefit from user growth and the continued growth of ad-based streaming over the coming quarters. If its revenue growth and margin expansion continues beyond 2026, the stock could easily double or triple from its current market cap around $10 billion.
