Streaming company Roku (ROKU 2.48%) has been a hot buy of late, rallying after posting some strong quarterly results. The business is growing and its losses have been shrinking. As a result, the stock recently hit a new 52-week high and as of Monday’s close, it was up more than 34% over the past 12 months. It has, however, dipped in recent days. Below, I’ll look at whether it’s a good buy right now.
Roku makes progress on the bottom line but breakeven remains elusive
On Feb. 13, Roku reported its fourth-quarter results for the last three months of 2024. The company showed 22% net revenue growth with sales rising to just over $1.2 billion for the period. And it also drastically reduced its operating loss, from $104 million in the prior-year period to just $39 million this past quarter.
The market was bullish on the news, with shares of Roku climbing as it beat expectations on both the top and bottom lines. The company plans to focus on more third-party platform integrations, which should result in more growth ahead, and that may help with getting the business back into the black. The company has battled with profitability but the good news is that it has been trending upward in recent quarters.
ROKU Operating Income (Quarterly) data by YCharts
Why Roku may face challenges ahead
Despite the seemingly strong performance, there are a few reasons I’m still a bit worried about the stock.
The first is that it relies heavily on advertising revenue, and if there’s an economic slowdown (potentially due to tariffs), companies may cut back on ad spend, which can significantly impact Roku’s top line. The streaming company also admits it got a boost this past quarter due to political ad spend, which is likely to slow down considerably now that the election has come and gone.
Secondly, while the company is focusing on working with third-party platforms, growing competition could hinder those opportunities. I’m referring to the Walmart acquisition of TV-maker Vizio, with the big-box retailer now looking to ramp up its advertising business. That’s still in the early stages as Walmart only closed its acquisition of Vizio in December, and so the full effect of that on Roku’s business won’t be felt for a while.
Lastly, there’s the issue of Roku’s devices segment, which is growing, but at an unprofitable rate. Roku recorded a devices gross profit loss of $47.4 million last quarter, which is more than double the $20.5 million loss it posted a year ago. Expanding into devices may seem like a good way to grow its top line, but that may not necessarily help Roku get out of the red.
I wouldn’t buy Roku just yet
I’m a fan of Roku’s devices and its platform, but I’m also concerned about how strong its business may be this year, as numerous obstacles could obstruct its growth prospects. And if the stock is trading at elevated levels, that makes it even more difficult to justify investing in the company right now.
I would suggest waiting at least a couple more quarters before making a decision on the streaming stock to see how the year progresses, to see how Roku performs and what moves Walmart makes, as that may have the biggest impact on Roku’s growth prospects, both in the near term and the long term.
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