Streaming company Roku (ROKU 2.59%) has been a brutal hold for investors since the stock peaked in 2021. Shares have fallen 89% from their high mark, meaning the stock will have to climb nine times in value for those who bought shares near the top to break even.
To say Roku is beaten down could be an understatement.
The company must progress in key areas to win back investors, but the stock's decline dramatically overstates the negatives and gives little to no credit for what the business has accomplished in the past few years.
Today, Roku is a mid-cap stock that, believe it or not, has the potential to increase tenfold from here. It won't happen overnight, but here's the case for Roku as a future multibagger worth buying today.
Roku has continued to expand its ecosystem
The company is best known for its streaming sticks and Roku-branded smart TVs, which allow people to access their content in one place. Streaming is a competitive field with content giants like Disney and Netflix and big technology companies like Amazon and Alphabet all offering competing platforms. Roku, wit its $7.8 billion market capitalization, may seem outclassed among this group.
However, the company has steadily thrived because it offers a great product. As of the first quarter, the company had 81.6 million streaming households, up 14% year over year, and these accounts increased their engagement 23% with 30.8 billion hours of content streamed. Trailing-12-month revenue now tops $3.6 billion, and approximately 85% of the top line comes from the platform (advertising and royalties) rather than hardware sales.
Data by YCharts.
Audiences continue to gravitate to the Roku platform, and the company's competitive footing strengthens as more people use it. It would be a different conversation if Roku's user base was stagnant or declining, but the company continues to grow despite being significantly smaller than its peers.
Some imperfections but nothing fatal
If there's something to point the finger at to explain the stock's decline, it would probably be Roku's lack of profits. The company may have $3.6 billion in trailing-12-month revenue, but it's still not profitable on a generally accepted accounting principles (GAAP) basis. Part of the issue is Roku has continually invested in growing the business, especially abroad where it's become the leading TV operating system brand in Mexico. The company is working on taking market share in Canada, Europe, Latin America, and Australia as well.
Roku has also invested in growing the Roku Channel, its in-house ad-supported streaming service. The Roku Channel has become a notable part of the business and is the platform's third-largest app by reach and engagement. Innovative engagement tools like shoppable ads have been featured on the platform too.
It's not all roses, however. Advertising is vital to Roku's business model. The company initially tried to build an in-house advertising platform similar to Meta and Alphabet. However, management hinted at changing course last quarter when it highlighted its intent to develop relationships with third-party ad platforms like The Trade Desk.
Owning the entire advertising ecosystem would have been ideal, but it's important for management to recognize when there's a need to adapt. Additionally, Roku is financially healthy with approximately $2.1 billion in cash against zero debt. The business is generating strong free cash flow too.
Sure, being profitable today would help investor sentiment, but there is undoubtedly long-term upside for this industry leader.
Can Roku rise 10x from here?
You will likely see investor sentiment toward Roku improve as a path to GAAP profits becomes more apparent in the coming quarters. Its net loss of $51 million in the first quarter was a massive improvement from the year-ago period's $194 million loss. And once that tide turns, things could get really interesting for Roku stock.
Recall this is a company worth $7.8 billion with $2.1 billion of cash on its balance sheet, giving it an enterprise value of $5.8 billion. Roku's enterprise value must approach $60 billion to 10x the stock. While that could take years to happen, it's a level Roku has seen before.
Data by YCharts.
Over its lifetime as public company, Roku has enjoyed an average enterprise-value-to-revenue multiple of nearly 10 times. If it reverts to that historical average, Roku would need approximately $6 billion of annual revenue to give shareholders a 10x return. Some analysts see revenue hitting that level by 2028.
While that turn of events might require a particularly bullish outlook, think of it this way: Roku could fall short and still outperform the market given its strong industry position and improving profitability. That favorable risk-reward dynamic is what makes Roku stock so compelling.
