The market is finally getting excited about Roku (ROKU 2.48%) stock again. The streaming company has been putting up some strong numbers, and trends are working in its favor. If you didn’t buy the stock over the past year, you lost out on the beginning of its rebound. But it’s just getting started, and if you have some time to hold on to the stock, you can benefit from the rest of a rebound as the business strengthens and the stock climbs. Here are three reasons to buy Roku stock right now.
1. It has a resilient business
Roku has had a bit of a bumpy ride moderating from pandemic acceleration, but it’s stabilized to steady, double-digit growth in both of its businesses. Although it’s more known for its device business, it makes much more money from its ad business. The device business has proven resilient over the past few years, with customers continuing to buy from a broad range of price points, bringing them into the Roku ecosystem. Roku is the top-selling operating system in the U.S., Canada, and Mexico and has been for the past six years.
From there, Roku can monetize viewers with its free Roku channels and ad-share model with ad-supported channels like Netflix and Disney. Even though the ad business was under pressure from inflation and reduced ad spend over the past two years or so, users and viewing hours have increased reliably.
In the 2024 fourth quarter, members increased 12% year over year to nearly 90 million, which it has already surpassed, and viewing hours rose by 18%. Management said that it will not report these metrics starting with the 2025 first quarter, but that it expects viewer households to keep growing.
2. It’s expanding internationally
Roku already has more than half of U.S. broadband households on its platform, and to continue adding new customers, it’s making a bigger play for the international market. It signed new deals with partners throughout Latin America and in the U.K. last year, and it’s expanding to other global markets. Considering its success and top position in its current markets, it has a good chance to perform well in new markets.
It’s focusing on getting the business up right now, and that could negatively impact metrics like average revenue per user (ARPU) in the interim. ARPU was trending flat or negative for a while, but it was up 4% year over year in the fourth quarter. The downtrend has been partially tied to the expansion, because more people on the system without a commensurate increase in ad spend will do that. The strategy is to onboard members first and generate increasing engagement, which brings on more advertisers and ad spend. It’s a long-haul focus, but the market doesn’t appreciate the short-term sacrifice.
3. Profitability is improving
Net losses have been a sore spot for Roku over the past few years. It’s struggling to turn a profit, and investors have been losing patience. But it’s making progress. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow have been positive for more than a year, and they increased 62% and 16% year over year, respectively, in the fourth quarter.
The device business hasn’t been profitable even on a gross basis, but it’s the gateway to the more profitable ad business. Device sales were only 16% of the total in the fourth quarter, and the gross loss more than doubled year over year. Management said the industry didn’t live up to expectations for holiday sales, and there’s been discounting to get rid of excess inventory. Platform business gross profit increased 22% year over year in the quarter.
Management said it’s expecting to report positive operating income next year, and Wall Street is expecting positive earnings per share (EPS) next year as well.
Expect the stock to reflect positive near-term progress in profitability. Long term, as the company becomes profitable and still reports growth from rebounding ad spend and new households, Roku stock could soar.
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