Roku: A Hidden Growth Opportunity or a Value Trap?

February 23, 2025

POINT

Roku (ROKU) exceeded Wall Street expectations in Q4 2024, reporting a 22% revenue increase and narrowing losses.
The company added 4.3M new accounts and saw an 18% increase in streaming hours, showing strong engagement.
Roku is focusing on profitability and expects to achieve positive operating income by 2026.
Despite trading at a 63% discount to its historical P/S ratio, concerns remain about competition from Apple, Amazon, and Google.
Long-term investors should consider Roku's potential but remain cautious about competitive pressures.

Details: Roku’s Recent Performance and Market Position

source : Motley News

1️⃣ Strong Q4 Results Show Improving Fundamentals

Roku reported Q4 2024 revenue of $1.2B, a 22% YoY increase, surpassing Wall Street estimates.

The company added 4.3M new accounts, bringing its total to 89.8M.
Streaming engagement remains strong, with 34.1B hours watched in Q4, an 18% YoY increase.
Average revenue per user (ARPU) rose 4%, indicating growing monetization efforts.

These results suggest that Roku is benefiting from the long-term trend of cord-cutting and the growth of streaming.

2️⃣ Path to Profitability: Can Roku Turn Its Growth Into Sustainable Earnings?

Roku has historically prioritized aggressive growth, leading to high spending on marketing and R&D.

However, the company is now shifting toward profitability, with Q4 operating losses shrinking to $39.1M.
Roku’s management expects full-year profitability by 2026.
Analysts project $1.71 EPS by 2027, a significant improvement from the -$0.89 EPS in 2024.

This suggests Roku could transition into a sustainable and scalable business, but execution risk remains.

3️⃣ Valuation: Discounted Stock or Justified Concerns?

At $88.86 per share, Roku’s market cap is $13B.

The stock currently trades at a P/S ratio of 3.4, well below its historical average of 9.1.
At its 2021 peak, the P/S ratio hit 33.5, showing how much investor sentiment has cooled.
63% discount to its historical valuation suggests the market is skeptical about Roku’s long-term potential.

While the stock appears cheap, investors should consider whether this discount is justified by fundamental risks.

Investor Take: Should You Buy Roku Stock?

✅ Bull Case
✔ Strong user growth and engagement (89.8M users, 34.1B hours streamed).
✔ Growing ARPU (+4% YoY) and a clear path to profitability by 2026.
✔ Streaming & digital ad markets are expanding, creating long-term growth potential.
✔ Stock is trading at a significant discount to historical valuations.

⚠️ Bear Case
❌ Fierce competition from Apple, Amazon, and Alphabet, all of which have superior financial resources.
❌ Roku's ad business must scale significantly to compete in the digital ad space.
❌ Achieving profitability is not guaranteed, and execution risk remains high.

Future Outlook & Investment Strategy

📌 Roku has strong growth potential, but competition remains a major risk.
📌 If Roku successfully scales its advertising business, the stock could be undervalued.
📌 Investors should monitor profitability improvements in 2025-2026 before making long-term commitments.
📌 For long-term investors, a dollar-cost averaging strategy may be prudent to hedge against volatility.

Conclusion: A High-Risk, High-Reward Play

Roku has growth tailwinds from streaming and digital ads but faces strong competition.
The stock appears cheap, but profitability and competitive positioning remain key concerns.
For aggressive long-term investors, Roku may offer upside, but caution is warranted.

Best strategy: Monitor Roku’s earnings trajectory in 2025-2026 before committing to a long-term position.

Source: https://www.fool.com/investing/2025/02/22/could-buying-roku-stock-today-set-you-up-for-life/

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