Admittedly, Roku (ROKU -3.13%) has become one of the more frustrating stocks over the last few years. Since the end of the pandemic's height, the once high-flying company has returned to losses, dealing with heavy competition and a struggling economy as revenue and customer gains failed to translate into stock growth.
However, despite those struggles, Roku's expansion has continued, and the company has maintained its leadership in North America while expanding internationally. These and other conditions could finally lead the entertainment stock to a market-beating return over the next year. Here's why.
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The state of Roku
At first glance, Roku appears well-positioned to prosper. Its TV operating system is the No. 1 seller in the U.S., Canada, and Mexico. It has also continued to expand in Latin America and Europe, and its strategy of taking a slight loss on device revenue to bring more people onto the platform continues to bring more viewers into its ecoystem.
As of the first quarter of 2025, streaming hours increased by 17% from year-ago levels. With platform revenue (primarily advertising) accounting for 86% of total revenue, its device revenue has effectively acted as a loss leader. Additionally, the Roku Channel, its free streaming channel designed to sell more ads, is now the No. 2 app on the Roku platform, a testament to its popularity.
Still, Roku stock has traded in a range since cratering in the 2022 bear market. Unfortunately, such successes have so far failed to overshadow concerns about the company.
For one, it must compete with tech heavyweights such as Apple, Amazon, and Alphabet.
As of now, Roku's market cap is only around $12 billion. Considering that that is much smaller than the cash positions of each of these competitors, Roku could easily find itself at a competitive disadvantage.
Additionally, Roku has employed a strategy of forgoing profits to build market share. Consequently, it has reported net losses in every quarter since the first quarter of 2022, and investors may have lost patience. Roku's decision to stop publishing average revenue per user (ARPU) numbers after the fourth quarter of last year likely did little to allay that concern.
Why Roku could beat the market
Nonetheless, as mentioned earlier, Roku has continued to grow its streaming hours, and that includes the post-pandemic era when users returned to their offline, pre-pandemic activities. This indicates that the company continues to succeed in expanding its user base.
The long-awaited return to profitability is on track to occur next year. Analysts have examined Roku and its financials, and the prevailing belief is that it will report a positive net income in 2026.
Furthermore, while free cash flow declined over the trailing 12 months, Roku has reported positive free cash flows since 2023. Now, free cash flow appears to be on the rebound. The company reported $137 million in free cash flow in Q1, far above the $46 million in the year-ago quarter.
Investors should also note the years of frustration with Roku have made its valuation attractive to new investors. In this case, investors cannot use price-to-earnings (P/E) ratios, since the company is not currently profitable.
Still, Roku's price-to-sales (P/S) ratio, which once topped 30 during the pandemic, now stands at about 2.8. In comparison, the S&P 500 average P/S ratio is 3.1. Assuming a return to profitability could catalyze the stock, that could set Roku shares up for significant returns.
Roku in one year
After years of frustration, Roku is well-positioned to outperform the market over the next year.
Admittedly, such a conclusion may seem odd after three years of rangebound trading. However, Roku has consistently maintained streaming hours growth and positive free cash flow for years.
Moreover, the company finally looks poised to turn profitable next year. Amid a valuation that has fallen below S&P 500 averages, it appears increasingly likely that a return to profitability will spark a recovery in the stock.
