Roku Stock Is Beaten Down Now, but It Could 10X

Globe and Mail

13 hours ago

It's been a frustrating past four years for patient Roku (NASDAQ: ROKU) shareholders. While the ticker's pullback from its pandemic-prompted 2021 peak wasn't exactly surprising (lots of stocks suffered a similar fate), what is surprising is that this one hasn't budged a bit since that slide.
Shares of the company are still down more than 80% from their 2021 high despite continued growth during this time. Blame a lack of profitability, maybe.
Just remain patient. Roku's day in the sun is coming. And it could be big once the ball finally gets rolling.
What Roku actually is
Roku is one of North America's favorite brands of streaming video players; it makes branded smart televisions as well. Indeed, industry researcher Pixalate reports that as of the fourth quarter of last year, Roku accounted for 39% of the United States' streaming device market, edging out Amazon, Apple, and Samsung. It's doing similarly well in Canada, and is absolutely crushing it in Mexico with control of 74% of the country's connected TV business.
And the rest of the world? While it's got pockets of respectable presence elsewhere, let's just say that -- for the time being anyway -- Roku isn't exactly a force to be reckoned with ... yet. (More on this in a moment.)
Roku's business, however, isn't quite what it seems to be on the surface.
While it's clearly a key seller of streaming technology, devices themselves are only a means to an end that account for about 14% of the company's total revenue, and don't produce any actual profit.
Rather, Roku's core business is monetizing its role as a middleman between streaming services and their subscribers. This revenue can come in the form of advertising one might see on the home screen or screen-saving "crawl" when using its hardware. The bulk of this business, however, is just a small recurring piece of streaming service providers' monthly fee charged to their subscribers.
On the order of 90 million households streamed 35.8 billion hours' worth of digital video during the first quarter of this year. That's roughly 400 hours of TV per household, most of which subscribe to more than one streaming service. At least within the United States, The Motley Fool's own in-house research arm reports the typical household subscribes to about four such services.
That being said, recognize that Roku isn't just a middleman. It also operates its own stand-alone ad-supported streaming service. It's no slouch either. Television-ratings agency Nielsen reports The Roku Channel delivers as much digital video to U.S. consumers as Paramount 's flagship streaming service Paramount+ does, and is nearing Amazon Prime's impressive domestic streaming reach.
The bullish case
This reach doesn't necessarily seem to be enough to catapult Roku shares 10 times above their present price -- especially without any actual profit production yet. After all, the streaming industry's growth is seemingly slowing, stymied by a very real "streaming fatigue" headwind. Branding and marketing consultancy Kantar, in fact, argues that paid streaming reached its domestic peak in the latter half of last year.
The streaming business isn't as much peaking, however, as it's entering a period of refinement and evolution. At the same time as consumers are culling subscriptions they don't use all that often, they're optimizing their streaming spending. This includes more usage of ad-supported services, and in a growing number of cases, free-to-watch ad-supported services.
The key nuance for interested investors to understand is that this evolution doesn't work against Roku -- the company is still a (very) necessary middleman, and still collects a bit of revenue simply for allowing consumers to access any given streaming service. Indeed, with The Roku Channel making inroads as a destination within the ad-supported/free-to-watch sliver of the streaming market, this company enjoys a slight competitive edge due to the industry's current evolution.
The crux of the reason to wade into a stake in lethargic Roku stock, however, is rooted in its potential for growth in overseas markets.
As was noted, this company isn't much of a player outside of North America. While Pixalate adds that Roku's share of the United Kingdom's streaming device market is a respectable 20%, its intended reach into Europe doesn't go any further than that. It's not exactly proliferating anywhere else on the planet, either.
This isn't an indication of a lack of marketability, though. It's by design.
See, Roku hasn't forced its way into markets much beyond U.S. borders largely because those markets weren't quite ready yet. The company also wanted to focus on North America at a time when that market was ready to explode.
Now those other opportunities are finally opening up. And Roku is capitalizing. Last year, it partnered with established TV manufacturers to introduce Roku television sets in Brazil, Colombia, Chile, and Peru, plugging it into a South American free/ad-supported streaming video market that Omdia expects to swell from last year's $231 million to $569 million by 2029. Separately but simultaneously, Ampere Analysis predicts Latin America's entire video entertainment market will grow by $6 billion for the same time frame, with two-thirds of that growth driven by subscription-based streaming services that Roku's technology makes easy to access.
For perspective, Roku did a little less than $4 billion worth of business last year.
And once this South American opportunity starts cooling, don't be surprised to see the company then turn its attention to yet another pocket of opportunity. There's certainly going to be enough of it. Precedence Research predicts the worldwide direct streaming business is set to grow at an average annualized pace of 24% through 2034, led by the Asian-Pacific region.
Far more potential than is being priced in
It won't necessarily be easy for Roku to win a significant share of this growth. U.S. consumers and their nearby neighbors were receptive to the domestic company's brand name. That may not quite be the case in all overseas markets. Things could prove particularly challenging in and around China, especially if the tariff-fought trade war becomes the new norm.
Roku is also going to bump into a saturation ceiling within the all-important U.S. market sooner or later, where average per-user revenue figures tend to be higher than anywhere else.
On balance, however, not nearly enough of Roku's long-term potential upside -- and eventual profitability -- is reflected in the stock's present price. Even analysts may be underestimating the company's potential, with a one-year consensus price target of $86.25 that's only about 17% above the stock's current price.
Don't be discouraged by that ho-hum target, though, or for that matter, by the stock's lethargic go-nowhere performance since tumbling in 2021 and 2022. Most everyone seems to be waiting for someone else to stick their neck out first, or perhaps waiting for clear hope of future profits.
Just don't tarry if you're a believer. Once Roku shares finally start crawling out of its rut, the right-pricing rally could be a speedy one that doesn't offer many great entry opportunities. The hard part will be remaining patient enough in the meantime, for whenever that strength finally materializes.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, and Roku. The Motley Fool has a disclosure policy.