Although the broader market is experiencing a robust year, Roku (ROKU) is navigating a different narrative in 2024. The streaming platform company's shares have declined, yet investor sentiment has markedly improved recently. This leads to an intriguing question: Can Roku outperform the S&P 500 between now and 2030? We'll delve into the bullish and bearish scenarios for Roku to assess whether it can generate an average annual return exceeding the historical 10% of the broader index.
Roku is strategically positioned to capitalize on the streaming trend, functioning as a platform that integrates various subscription services for audiences. Additionally, it provides advertisers with tools to target specific demographics, making it well-suited to benefit from the ongoing decline in cable subscriptions. From 105 million U.S. households with cable in 2010, the number has halved to 53 million. The shift towards streaming is driven by superior experience and cost-effectiveness, establishing Roku as a valuable one-stop shop for streaming content.
Currently, Roku boasts 83.6 million active accounts, yet there remain nearly 800 million broadband-enabled households globally. If Roku penetrated even 25% of this market, it could unlock significant financial potential. As more viewers transition to streaming, Roku's platform can attract increased advertising expenditure, bolstering its profitability as the company refines its cost management. Previously a Wall Street favorite, Roku saw its shares soar by almost 2,000% post-IPO in 2017 until their peak in 2021, but they have since plummeted by 84%. However, the current valuation is compelling with a price-to-sales ratio of 3, far below Roku's historical average.
Roku's platform is compatible with most major streaming services, giving it access to a broad user base. Familiar names like Netflix, Walt Disney, and Warner Bros Discovery invest heavily in content to lure subscribers. However, Roku may have limited bargaining power with these content giants, as they provide minimal revenue to these enterprises. If major services like Netflix, Disney, or YouTube opted not to collaborate with Roku, they likely wouldn't suffer significant setbacks due to their own substantial subscriber bases.
Despite its categorization as a growth business, Roku has struggled with profitability. Over the past two quarters, it reported a combined net loss of $85 million. While management is prioritizing cost-cutting strategies, consistent earnings may not materialize soon, presenting risks for investors. Competition is another hurdle for Roku, as it contends with well-capitalized tech elites like Alphabet, Apple, and Amazon, who pose significant challenges to Roku's market expansion.
The bearish perspective on Roku carries weight, given the competitive and financial hurdles. Nonetheless, there are compelling arguments favoring Roku's potential to outperform the S&P 500 in the coming six years. Its strategic positioning within the growing streaming sector, opportunities for increased market penetration, and strategies for monetizing advertising spend could pave the way for substantial future returns.
