At first glance, Year (NASDAQ: ROKU) This looks like a stock to avoid. Shares are trading down 87% from their 2021 high, for example, and are still within sight of their early 2023 low. The company also remains unprofitable. Not to mention, the streaming industry growth that Roku was built on appears to be over.
There are two important tips to remember here, though. First, there is often more to the story than meets the eye. Second, stocks ultimately reflect the likely future of the underlying business rather than its past.
When you embrace these two concepts, Roku stock suddenly appears as an attractive addition to risk-tolerant investors’ growth portfolios.
What exactly is Roku?
In case you’re reading this and don’t know, Roku makes and licenses devices that “stream” digital video from services like Netflix Or Walt DisneyHulu is the most widely used connected TV platform in the United States. As of late March, it serves as a technology conduit to 81.6 million households. Most of those users are in the United States, though the company also serves a handful of foreign customers.
But its activity is not really limited to streaming Boxes or smart TVs are just a means to an end. Roku’s main profit center is advertising, which accounts for 85% of its revenue and all of its profits. In effect, Roku is a toll booth of sorts. Once people subscribe to Netflix, Walt Disney’s Disney+, or any other streaming service, they need a device to stream that programming. Roku provides those devices, charging a nominal fee to the company that provides the programming.
The monetization of the Roku platform doesn’t stop there. Brands of all kinds can also pay to have their products, services, and even just their brand name appear on the home screens and screensavers of these devices.
Roku is even going after the streaming industry’s newest and hottest growth engine. It’s called free ad-supported television, or FAST. Roku operates its own streaming channel, called The Roku Channel, which occasionally injects TV ads into its programming.
All these elements contribute to a constantly growing turnover.
Right place, right time, right platform
What is this a constantly growing turnover has yet to generate consistent profit, which is likely why the stock has performed so poorly since surging during and because of the COVID-19 pandemic.
As we’ve pointed out before, a company’s past doesn’t necessarily have to be its future. In this case, it probably isn’t. Based on current streaming industry trends and trajectories, the analyst community expects Roku to become profitable by 2027, and then expand in 2028.
The fact is that there is no reason to doubt these optimistic prospects.
Investors who watch the streaming industry likely recognize that it is hitting a growth wall…
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