Over the past two years, Roku (ROKU 0.73%) has taken its shareholders on a volatile ride. The company faced several challenges in 2024, including a decrease in average revenue per user. However, the streaming specialist has outperformed broader equities over the trailing-12-month period, partly due to stronger financial results. The good news is that, even at its current levels, there may still be plenty of upside for those who invest their hard-earned money in the stock today. Here is why Roku remains a top pick for investors.
What does Roku do?
It's hard to determine the exact number of streaming platforms available. New ones keep popping up left and right, often focusing on a slightly different content strategy. Chasing them down would be cumbersome if not for the model Roku helped pioneer. Roku's platform gathers at least the most prominent streaming services on a single, integrated platform. Its ecosystem is convenient for viewers, which is why the platform's engagement has been steadily rising for some time. In the second quarter, the company recorded 35.4 billion viewing hours, 5.2 billion higher than the comparable period of the previous fiscal year.
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Part of Roku's strategy has been to sell its namesake devices at a loss -- that's what has helped the company significantly grow its user base. Although it no longer reports quarterly numbers, the company had 89.8 million households as of the end of 2024. Roku's large audience makes it a target for advertisers, the company's most important source of sales. The streaming leader's ad business continues to help it post strong top-line growth. In the second quarter, Roku's revenue increased by 15% year over year to $1.1 billion.
Roku's platform revenue -- where it records ad sales (among other things) -- grew even faster, by 18% year over year to $975.5 million. Furthermore, although Roku is not yet consistently profitable, it posted a profit on the bottom line during the period. The company's second-quarter earnings per share were $0.07, compared to a net loss per share of $0.24 in the same period last year.
Why the future is bright
Roku signed a partnership with Amazon in June that gave advertisers in the U.S. access to the combined ecosystem of these two leading connected TV players through Amazon's advertising platform. As Roku pointed out, early tests of this integration showed that companies could get a higher return on investment for their ad campaigns.
The move jolted Roku's stock for all the right reasons. The company's platform was already somewhat of a magnet for advertisers, but businesses being able to achieve better conversions using less money should attract even more of them. This highlights a key reason why Roku could perform well over the long term. The company's streaming households as of the end of 2024, 89.8 million, are merely a fraction of the total addressable market. For instance, Netflix alone has far more paid subscribers than that.
Furthermore, viewing hours will also increase over time as cable increasingly loses favor and people switch to streaming. Roku, for its part, is ready to ride that wave, having become the leading CTV company in North America. That's why Amazon partnered with Roku, and the more viewership and engagement the company can attract, the more it will be able to land partnerships of this kind, and the more advertisers will seek out its platform.
Roku's ecosystem benefits from a network effect, a moat that could enable it to remain the top player in this niche for at least the next five to 10 years. Lastly, the stock remains somewhat reasonably valued. Roku's forward price-to-sales tops 2.9 (since it isn't consistently profitable, its price-to-earnings ratio isn't very meaningful). While the official undervalued range starts at 2 and below, given Roku's strong financial results, leadership in its niche, and excellent prospects, the stock is worth a premium -- and at current levels, it does not look prohibitively expensive. Roku can still beat the market for investors who buy its shares today.
