Will Roku Ever Be Profitable?

Roku (NASDAQ:ROKU) is among the best-known makers of streaming technology. With tens of millions of accounts worldwide, Roku provides streaming services through an array of streaming devices, smart TVs and its mobile app.

Despite its incredible popularity, Roku is still losing money and has been a poor stock for investors to own. In the last 12 months, shares of ROKU are down over 27%, even as the S&P 500 has gained nearly 31% during the same time frame.

Will Roku ever post numbers in the black on its bottom line, and can the stock bounce back to help shareholders regain the ground they have lost?

Is Roku Moving in the Right Direction?

A cursory glance at Roku’s performance over the last several quarters reveals that the company’s losses are gradually narrowing.

In Q3, for instance, the company lost just $9 million, the best result it has delivered since early 2022. Trailing 12-month losses have also fallen considerably.

For the year ending in Q3, Roku lost about $172 million. Going back to the 12 months ending in Q3 of 2023, that number was about $869 million.

It’s also worth acknowledging that Roku has experienced at least a brief period of profitability in the past. From Q3 of 2020 through Q4 of 2021, the company delivered positive net income.

The reality now is that Roku’s few positive quarters were dwarfed by the losses that followed. The highest trailing 12-month net income the company ever reported was $285 million in Q3 of 2021.

In the single third quarter of 2023 alone, Roku lost $330 million. Despite these losses, though, Roku has managed to avoid taking on long-term debt.

Roku’s Growth Persists In Spite of Profitability Woes

Another thing that is important to consider is whether or not Roku is still growing as a business. Once again, the trend here looks fairly positive. Q3’s earnings report detailed 16% year-over-year revenue growth to $1.062 billion and 30% gross profit growth to $480 million.

Beyond its financial metrics, Roku also reported some fairly positive trends in terms of user growth. The number of households streaming content through Roku rose to 85.5 million, up by about 2.0 million from the previous quarter alone.

The number of hours streamed also rose, growing to 32.0 billion for the quarter. While Roku wasn’t able to increase the average annualized revenue it derived from each user during Q3, the number remained stable at $41.10.

Unlike earnings, Roku’s revenue growth has been more or less consistently positive throughout its history. Revenue has risen on a year-over-year basis in every quarter since 2018, though there were a couple of quarters in late 2022 and early 2023 where the positive growth rate was almost negligible. As a result, the annual revenues the company is able to generate have exploded since it went public.

In 2020, Roku reported a total annual revenue of $1.78 billion. For the 12 months ending in Q3, revenue totaled $3.90 billion.

What’s Standing in Roku’s Way?

Where Roku does run into choppy waters is its lack of original content, unlike say Netflix or Disney. That’s because Roku acts as a middleman between streaming content creators and the customers who use its connected devices.

The reason this has the potential to cause more problems over time is that creators are increasingly pursuing a more direct-to-consumer model that puts Roku in a relatively weak position within its market.

And that’s not where the issues end because Roku is still losing money on the devices it sells. While the business model behind Roku is to make money on streaming revenue after taking an initial loss on its devices, the amount of revenue it generates on a per-user basis is still fairly small and so puts Roku in the less-than-desirable position of having to lose money up front in order to make small amounts from its users over time.

So, Will Roku Ever Be Profitable Again?

It is likely that Roku will return to profitability given fast year-over-year revenue growth of 16.5% last quarter in addition to a 45.1% gross margin.

The company is clearly headed in the right direction and has been able to pare back its losses quite a lot in the last year. All things considered, it doesn’t seem that it would take much to push Roku back into modest positive net income.

For investors the bigger question may well be Roku’s viability as a long-term investment. Competition in the streaming marketplace is only heating up, and Roku doesn’t appear to have a particularly obvious way to widen its moat. In the long run, management has a real puzzle on its hands to establish competitive advantages that will stand the test of time.

Wall Street Sees Limited Upside 

Parenthetically, it’s also worth noting that in 2025 Roku will be updating its KPIs to no longer reflect average revenue per user. Instead, the company will choose to focus more on platform revenue. While platform revenue is certainly important, this change may well draw attention away from its fairly low revenue per user, which is one of its weaker points as a business.

Even Wall Street doesn’t seem to see a great deal of upside in Roku, despite the fact that the stock is heavily sold off and has underperformed the high-flying S&P over the past year.

The consensus among analysts is for the stock to hit $78.78 per share, a gain of 13.8% from present levels, and notably that gain if realized will fall shy of compensating for losses over the past 12 months.

Although Roku seems to be on track to achieve net profitability again, the stock likely isn’t a great buy at the moment. Long-term competitive pressures and a low per-user revenue rate both work against Roku and could keep putting pressure on the stock. Right now, Roku’s investment proposition seems somewhat weak.

As Warren Buffett has famously observed, investors don’t have to make money back the same way they lost it. Buying Roku shares at the moment may involve the risk of falling into that trap, and there are likely better options out there for investors with long time horizons.

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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.