A lot can go right for the streaming TV pioneer by 2027. Even the bearish scenario isn't so bad.
Last year was great for Roku (ROKU 0.76%) investors, but the streaming video pioneer that more than doubled in 2023 has been a major market laggard this year. The stock has shed a third of its value in 2024. Can it get back on track?
Roku has had a few near-term challenges, but let's zoom out a bit. Take out a Roku remote and fast forward to the springtime of 2027. Is the popular operating system for streaming on TVs doing better or worse than it is right now? A lot can happen in the next three years.
The bullish scenario
The upside is substantial if things go well for Roku. The shares peaked above $490 three summers ago. Getting back there three summers from now would make the stock nearly an 8-bagger from today's starting line.
Before diving into the things that Roku needs to fix between now and 2027 let's dive into what it's doing right. The platform continues to grow both its audience and engagement levels. There are now 81.6 million streaming households on the platform, a 14% increase over the past year. The 30.8 billion hours that these homes spent streaming via Roku's operating system through the first three months of this year is a 23% year-over-year jump. With usage outpacing household growth it means the average Roku user is spending more time on Roku.
Roku competes against some of the most valuable companies on the planet to be your streaming TV gateway, and it's winning. There are disadvantages to being small, but it has been able to pick up some decent original properties to anchor users to its hub, like the Quibi catalog and Weird: The Al Yankovic Story. This week it turned heads by announcing exclusive multiyear rights for Major League Baseball's Sunday Leadoff live games.
The once-profitable Roku is still in the red, but it is making headway on that front. It has posted positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of at least $40 million in each of the last three quarters. Free cash flow hit a multiyear high in its latest report. Analysts see it returning to profitability by 2027, and continued growth can help get it there faster.
Image source: Getty Images.
The bearish scenario
Now is probably a good time to delve into the things that have been keeping Roku down in 2024. Despite posting a better-than-expected 19% increase in revenue in its latest quarter -- and accelerating top-line growth in four of its last five reports -- Roku's guidance for the balance of the year is problematic. The company sees revenue climbing just 10% for the current quarter with adjusted EBITDA snapping its streak of topping $40 million. It's bracing for moderate growth for the second half of the year, working on growth initiatives to get back on track in 2025.
No one likes driving a car with a broken accelerator, but that's not the only thing weighing on investors. Investors have been rattled since Walmartannounced a $2.3 billion deal for smart TV manufacturer Vizio. This isn't a deal for a TV builder. Vizio TVs come with the SmartCast operating system, a rival for Roku's audience. SmartCast is the sixth-largest player, but under Walmart's reach it could expand the platform. It could also mean the end for Roku as the operating system on Walmart's in-house Onn TV brand.
The Walmart deal isn't a lock to close. The Federal Trade Commission began an in-depth antitrust review two weeks ago. The review was expected, and likely why Walmart targeted the smaller Vizio instead of going for Roku itself. With Roku already competing with a couple of cash-rich companies, it's not helpful to see Walmart lifting the profile of a fringe streaming operating system.
The pessimism is thick, and growing. Short interest is now at a three-year high. If Walmart's entry comes at Roku's expense it will make it harder for Roku to return to profitability. If it loses the lead in streaming it could also get in the way of being an essential outlet for connected TV advertisers.
Splitting the difference
Roku is unlikely to revisit its 2021 highs in 2027. It doesn't have to be an 8-bagger in three years to be a winner. There is seemingly a floor here. If Walmart's willing to pay $2.3 billion for Vizio what is Roku worth in a buyout if the business model needs a lifeboat? SmartCast reaches a quarter of Roku's audience and is achieving a fifth of its platform revenue. Is Roku worth at least 5 times Vizio in a buyout from a suitor that won't face similar antitrust scrutiny? If so you'll be happy to know that Roku's enterprise value is currently just $7.6 billion.
The ceiling is naturally higher if Roku continues to be a leading streaming service stock. Ad dollars are migrating from legacy TV to digital offerings. Roku users are spending on average more than four hours a day on the platform. Roku doubling if not tripling in the next three years is realistic if it can grow its reach globally without losing its strong engagement. It's time to tune in to Roku as an opportunity.
Rick Munarriz has positions in Roku. The Motley Fool has positions in and recommends Roku and Walmart. The Motley Fool has a disclosure policy.
