Roku Stock: A Potential for Growth in 2025

The S&P 500 has wrapped up another impressive year, reinforcing the idea that investors might want to consider allocating some funds into index-based exchange-traded funds (ETFs). While the S&P 500 is a common benchmark for the market, it only represents 500 companies out of the vast number of publicly traded firms. This means it’s an average, so individual companies may have significantly different performances.

Roku (ROKU 3.88%) is a well-known player in the streaming industry and is currently not part of the S&P 500. Despite the overall market’s strong showing in 2024, Roku saw its stock decline by 19%. This downturn has roots in several short-term concerns, but there are reasons to believe Roku’s stock could rebound and possibly double by the end of 2025.

Reasons for Market Skepticism Toward Roku

Roku has not faced significant challenges in growing its platform. After a period of irregular growth following the pandemic, both its device and content businesses are now expanding at solid rates. However, Roku's stock took a plunge after starting the previous year on a positive note. Key factors that contributed to the market's negative outlook on Roku include:

• Walmart announced the acquisition of Roku’s competitor, Vizio, with the deal finalizing recently.
• Roku's fourth-quarter results for 2023 were mixed.
• Its average revenue per user (ARPU) has remained stagnant.
• Ongoing substantial losses have raised concerns.
• Advertising sales have faced pressure due to inflationary trends.

Potential for Change

With Walmart’s acquisition now finalized, it appears Vizio is unlikely to disrupt Roku's leading position in the market. Roku remains the top streaming platform in the U.S., Canada, and Mexico, having sold more devices than its two closest competitors combined in the last quarter. This competitive edge, coupled with strategic innovations and partnerships, positions Roku well for future success.

The company has also shown good progress toward profitability, achieving five consecutive quarters of positive free cash flow and improved earnings metrics. Although many analysts expect Roku to remain unprofitable in 2025, company management projects a narrower net loss for the fourth quarter, which might indicate a pathway toward increased profitability.

Roku also has significant room for international growth, currently prioritizing expansion in foreign markets. This focus partly explains the stagnation in its ARPU, as new users in these markets are being added quickly, yet the ad revenue is not growing at the same pace.

Factors That Could Cause Roku's Stock to Double This Year

Several factors could accelerate Roku's stock price this year. The advertising industry is showing signs of recovery, and Roku's leading platform is likely to benefit from increased ad spending. The company has recently inked a deal with The Trade Desk, which aims to simplify the ad-buying process, and it is making strides in its global expansion efforts.

Roku's management has reported expectations for a 16% year-over-year revenue increase in the fourth quarter. If this growth continues into 2025, Roku could reach about $4.5 billion in trailing 12-month revenue by next year.

Should profitability continue to improve and market confidence in Roku's future prospects strengthen, its price-to-sales ratio is likely to rise. Presently, this ratio sits low at 2.7, but it was over 4 before the stock's drop last year. With projected revenue figures of $4.5 billion and a restored price-to-sales ratio of 4, Roku's market cap could reach $18 billion—an increase of almost 80% from its current valuation.

If growth accelerates or market enthusiasm boosts Roku's valuation even further, it's possible the stock could even double over the next twelve months.

While there are no certainties about these developments materializing, the stock's disappointing performance last year was based on temporary issues. As these challenges diminish, the market could become more ready to recognize Roku’s potential in 2025.

No individual mentioned in this analysis holds a position in any of the discussed stocks.

Roku, stock, growth