Roku (ROKU +0.39%) has made balancing multiple streaming services much easier over the years. Simply plug one of its streaming sticks into your TV, and you can quickly access content from a wide range of streaming services. Its Roku channel also provides users with loads of free content.
But the company faces a daunting road ahead. There are more smart TVs than before with their own technologies, lessening the need for one of its streaming sticks. And with Walmart in the process of acquiring smart TV maker Vizio, Roku's software could face an uptick in competition in that arena.
All of this means that the business may need to pivot -- drastically.
NASDAQ: ROKU
Key Data Points
Roku has been expanding into other devices
In recent years, Roku has been expanding its line of products to go beyond just selling streaming sticks. It also offers audio products and smart home devices, including doorbells. The company is even making its own TVs. Previously, it relied on other manufacturers.
Five years from now, the company could expand into more devices and have an even wider array of products. By doing so, it can open up more growth opportunities for the business. That could mean a significant change in its revenue mix as well.
The company currently generates about 14% of its revenue from devices, versus 86% from its platform segment, which includes digital ad sales. Between the headwinds from a potentially more competitive smart TV market and a bigger move into devices, I would expect devices to make up a significantly larger portion of revenue for the business in the future.
Thus far, diversifying has been paying off for the business' top line. Roku's growth rate has been picking up in recent quarters although it still remains below its long-run average.
ROKU Revenue (Quarterly YoY Growth) data by YCharts.
A more problematic trend is the bottom line
Igniting its revenue growth via more device offerings would certainly be a positive, but my concern is that it may not help Roku's sluggish bottom line. As the company has dived deeper into hardware products, which generate lower margins for the business, there's been a notable drop in earnings. Roku has gone from being consistently around breakeven to now regularly being in the red.
ROKU Net Income (Quarterly) data by YCharts.
If the company continues on its transition toward growth and having a broader array of products in its portfolio, that will help its growth rate, but it could come at a much greater cost: worsening margins. Roku has incurred a gross loss on its devices in each of the past four quarters.
The gross margin it generates from its platform business has been the only reason Roku's overall gross profit has been able to remain positive.
Roku is a stock that could sink much further
Shares of Roku took off during COVID-fueled lockdowns, but the stock has been struggling ever since. In just the past three years, it has nosedived by an incredible 85%. Unfortunately, with an uncertain future -- particularly with Vizio potentially being a much greater threat now that it may have Walmart helping fund its growth -- things may get worse for Roku in the years ahead.
The stock's best days may be long gone. Between a more challenging smart TV market and a devices segment that isn't even generating positive margins, it's hard to remain optimistic about Roku in the long run. Investors may be better off looking at other growth stocks.
