Of course, speculating on the “best investment” of the decade is almost impossible. Such investments are often made in unfamiliar companies and sectors, often surprising investors the moment they hear about them.
However, in the world of known value propositions, it may soon be time to Roku (ROKU 2.55%) stock to realize its potential. It’s down 85% from its 2021 peak amid its struggles, and with the company consolidating its growth, the right catalyst could finally make that happen. entertainment actions to catapult itself to its historic heights and beyond.
Why Roku continued to struggle
Indeed, many investors have likely lost patience with Roku. After making spectacular gains in 2021, which it then lost during the 2022 bear market, Roku stock has struggled to recover.
Investors sold shares as operational losses continue and average revenue per user (ARPU) growth remains stable. As of Q3 2024, ARPU was $41.10 over the trailing 12 months, roughly the same level as a year ago. Roku cited efforts to increase scale and engagement in international markets as the reason for the stagnation.
Additionally, investors seem to panic every time news about a potential competitor emerges. This happened in 2022 when Walmart acquired Vizio and, more recently, amid rumors The exchange office planned to launch its own TV operating system.
Signs of optimism
But here’s the thing: competition is nothing new for Roku. It has long had to compete with tech giants like Google’s parent company Alphabet, Amazonand Samsung. Despite these threats, Roku became the best-selling platform in the United States and other countries, with a first-mover advantage, an easy-to-use platform that did not explicitly favor a streaming service and its promotion of competitive advantages in the advertising space.
Additionally, regardless of market sentiment, Roku has continued to capitalize on a centuries-old transition from cable TV to streaming. This has allowed it to grow consistently in two key areas: active users and streaming hours. As of the end of the third quarter, its 86 million users were up 13% annually, while streaming hours increased 20% over the same period to 32 billion.
Additionally, despite all the concerns about stagnant ARPU growth, its financials continue to improve. During the first nine months of 2024, its revenue of $2.9 billion increased 16% compared to the same period of 2023.
Certainly, amid its $283 million in stock-based compensation costs, operating expenses remain high. Still, the net loss of $94 billion in the first three quarters was down from $631 million in the same period last year.
Additionally, Roku reported $157 million in free cash flow for the trailing 12 months, the fifth consecutive quarter of positive free cash flow. This minimizes the impact of a net loss caused by non-cash expenses such as stock-based compensation.
Finally, thanks to its falling stock price, Roku has become a bargain. Indeed, the losses leave it without a price/earnings ratio (price/earnings ratio. However, it is price/sales ratio (P/S) amounts to 2.7, a level lower that the S&P500The average sales multiple of 3.2.
The sales multiple is also only a tiny fraction of its 2021 highs, when its P/S ratio briefly exceeded 30. So if Roku can fuel investor optimism again, the stock holds enormous upside potential. expansion of multiples.
Investing in Roku Stock
In terms of predictable potential, Roku could turn out to be the best upcoming investment of the decade.
However, such predictions are highly speculative. Additionally, persistent losses and the apparent inability to grow its ARPU remain sticking points for many investors.
Nonetheless, the market has long ignored Roku’s earning potential despite the growing popularity and usage of its platform. It has also thrived despite its heavyweight competition, and its historical P/S ratio suggests huge growth potential if it begins to significantly increase its ARPU.
Given its growing user base and improving financials, investors may want to consider buying Roku stock now before the company shows it can better monetize its platform.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Healy holds positions in Roku and The Trade Desk. The Motley Fool holds positions and recommends Alphabet, Amazon, Roku, The Trade Desk and Walmart. The Mad Motley has a disclosure policy.