Streaming software and hardware maker Roku (NASDAQ:ROKU) has seen its stock go on something of a wild ride in the last few years. The tech stock run of 2021 saw Roku shares reach an all-time high of $476.50.
Recently, shares of ROKU trade much more modestly at around $80, but they have risen by nearly 40 percent over the last year so is the stock finally on the road to a lasting recovery, and how high will Roku go from here?
Roku Is Still Crushing It
One of the standout features of Roku is its steady rate of high revenue growth. Roku’s sales have grown in each quarter since 2018, and for the last 8 consecutive quarters the rate of growth has ranged from a low of 10.9 percent to a high of 22.0 percent.
This trend held true in Q1, with Roku reporting a 16 percent increase in total net revenue to $1.02 billion. Roku’s gross profit came in at $445 million, a 15 percent increase over the previous year.
Total streaming hours also increased markedly to 35.8 billion, a gain of more than 5 billion hours compared to the year-ago quarter.
In Q2, Roku expects revenue growth to slow down a bit, though it still anticipates an 11% year-over-year growth rate. Management expects platform revenue of $3.95 billion for the full year, and platform gross margin is expected to come in at about 51%.
Even more importantly, Roku has been gradually paring back its losses and moving in the direction of net profitability.
The leadership team reported net profitability at the turn of the decade but by mid-2023 its trailing 12-month net margin had fallen below -25 percent.
Though Roku still hasn’t made it back to profitability, its net margin for the last 12 reported months is now only -2.5 percent. With the business potentially becoming profitable again in the near future, Roku shareholders could see the stock keep breaking out of its long slump.
Is The Market Share Dip A Worry?
Although its market share in the connected TV market has fallen off of the high it reached in 2023, Roku remains the top CTV business in the US with a 39% market share. With so many connected devices and a large existing share of the market, it seems unlikely that Roku will go anywhere anytime soon.
This moat may well be broadened as the number of streaming services available to consumers keeps mushrooming. Roku places all of a user’s streaming services on a single, easy-to-navigate platform.
The product teams are still refining the home screen and progressively increasing viewer engagement. Plus, by extension, they’re driving subscription growth. With a large number of American households already using Roku, the business is likely to keep growing in line with connected TV consumption.
Management is even branching out to generate revenue beyond its own platform. Shortly after Q1 earnings were announced, for example, Roku revealed that it would be buying Frndly TV, a Colorado-based streaming service provider.
Although available on Roku, Frndly also streams to various Amazon, Google, Apple and other connected TVs. This was a major move for Roku, which has been quiet on the acquisition front since buying This Old House in early 2021. Disciplined acquisition of small streaming services like Frndly, however, could help Roku diversify its revenue base and set itself up for further growth.
Is Roku Undervalued
Although Roku probably isn’t sharply undervalued at the moment, investors may have a chance to buy the stock at a fair price. Roku currently trades at 2.8 times sales, sticking close to the range of P/S ratios that have prevailed over the past couple of years.
Given the double-digit revenue growth Roku is still posting and the fact that it has moved slowly closer to profitability over the last year, it’s likely the stock is a somewhat better buy today than it was at a similar multiple to sales a year ago.
Analysts also see Roku as being more or less fairly valued, with the consensus price target for the stock currently being $85.22 against a trading price of $80.48. With the business still in a good position for future growth, this reasonable pricing could leave ROKU room to keep rising without being dragged down by an overly rosy valuation.
One concerning development that has emerged as Roku’s share prices have risen over the last year is a shifting of institutional activity in the stock to selling.
In the last six months, for example, institutional investors have sold about half again as much ROKU as they’ve bought. Although this is slightly worrisome, it’s worth noting that insiders have actually been increasing their ownership of the business over the same period.
How High Can Roku Go?
Roku shares can climb to the $90 per share level over the next two years based on a re-rating of the price-to-sales multiple.
With Roku still progressing toward net profitability, the best guide for near-term returns is likely its remarkably stable price-to-sales ratio. The forward rate of revenue growth is projected at about 13.5 percent.
Following this and assuming the P/S ratio holds steady as it has through much of the last two years, it seems reasonable to expect share prices in the low $90s within the next year.
Though a bit above the consensus price forecast, this is still well within the range of analyst projections and far below the highest price target of $130.
Roku may face some choppy conditions in 2025 that are likely to exert some downward pressure on its shares. Specifically, Roku’s device business could expose it to the risk of higher input costs and supply chain disruptions resulting from higher tariffs. These factors could affect Roku’s growth, but it’s likely that the business will be able to navigate trade-related challenges while maintaining its moat.
Looking further down the line, it’s likely that Roku shares could rise considerably more if and when the business becomes profitable on a net basis.
To date, Roku has achieved a market cap of almost $12 billion while delivering negative net margins, ROEs and ROICs. A move toward net profitability could break the stock out of its stable but comparatively low P/S range and eventually propel shares into triple-digit territory.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
