A Brighter Future Ahead for Roku Investors?
As the calendar flips to a new year, investors are eager to leave the disappointments of 2024 behind. For streaming company Roku (NASDAQ: ROKU), last year’s 18% decline, despite the S&P 500’s 26% gain, was a significant setback. However, there are reasons to believe that Roku’s fortunes could change for the better in the years to come.
The Platform Business Holds the Key
While many consumers know Roku for its streaming devices, investors are aware that the real money-maker is its platform business. By selling ads through its platform, Roku generates revenue that dwarfs its device sales. In the third quarter, platform sales increased 15%, accounting for a staggering 85% of total sales. This high-margin business boasts a gross margin of 45.2%, its highest since the second quarter of 2023.
Engagement Metrics Tell a Promising Story
Roku’s engagement metrics paint a rosy picture. Membership grew 13% year over year to over 85 million households, with streaming hours increasing 20%. The Roku channel, in particular, is experiencing rapid growth, with streaming hours up 80% year over year in the third quarter. This bodes well for the company’s ability to supercharge its ad business and drive revenue growth.
International Expansion: A Key Growth Driver
Management is taking concrete steps to scale the business, including a push into international markets. This move is expected to be a strong growth driver over the next five years, as Roku focuses on acquiring new members and increasing engagement. While the company still needs to prove it can effectively monetize its international growth, the potential is undeniable.
Innovating for Success
Roku is constantly innovating to stay ahead of the competition. Recent developments include the placement of ads on the home screen, allowing advertisers to target users even when they’re streaming premium content. The company is also cementing new partnerships, such as its deal with Ally Bank to create engaging viewing content.
Challenges Remain, but Progress is Being Made
Despite its growth and lead in the sector, Roku is still struggling to translate its success into profitable growth. The advertising industry’s struggles with inflation have hindered Roku’s ability to capitalize on its streaming hour growth. However, the company has posted five consecutive quarters of positive adjusted EBITDA and trailing-12-month free cash flow, indicating signs of healthy improvement.
A Profitable Future Ahead?
Considering Roku’s size, position, and improvements, it’s likely that the company will achieve profitability in the next five years. While management is guiding for a loss in the fourth quarter of 2024, the company’s progress suggests that it’s on the right track.
A Solid Multi-Year Investment?
Barring unforeseen circumstances, Roku appears poised to reach its goals and become a solid multi-year investment. With its edge over other streaming platforms, Roku is well-positioned to continue growing its user base and increasing revenue. As the company continues to innovate and expand internationally, its stock could reward investors handsomely over the next five years.
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