the Standard & Poor’s 500I just finished another blast yearhighlighting how logical it makes sense for investors to put some money into index-based exchange-traded funds (ETFs). The S&P 500 is often used as a proxy for the market, but it tracks only 500 companies out of thousands. It is also average, meaning that any of its components could perform much better, or much worse.
year(NASDAQ:ROKU) It’s a stock and industry leader that’s not in the S&P 500, and in contrast to the market’s strong performance in 2024, Roku ended the year down 19%. There were reasons behind the negative market sentiment towards Roku, but they may be short-term issues. In fact, I can see a scenario where Roku stock finally overcomes the market negativity and doubles in 2025.
Roku hasn’t had much trouble developing its platform lately. It went through a period of lumpiness after the pandemic accelerated its growth, but its hardware and platform businesses are now growing at double-digit percentage rates. He actually got off to a great start last year before regressing. Among the reasons for the market decline on Roku in 2024 are:
Walmart It said it would acquire Roku competitor Vizio. The deal was announced last February, but was not completed until last month.
Advertising sales have been under pressure due to inflation.
The Walmart purchase is complete, and it doesn’t look like Vizio will knock Roku off its industry-leading position. Roku remains the No. 1 streaming platform operator in the US, Canada and Mexico, and sold more devices in the third quarter than the next two platforms combined. This is solid progress, and as it fills its moat with innovations and partnerships, it should continue to be number one.
The company has also made healthy progress on profitability, with five consecutive quarters of positive free cash flow and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).
It’s in an excellent cash position, and although the average view among Wall Street analysts is that it won’t turn a profit in 2025, management has projected that it will report a tougher net loss in the just-concluded fourth quarter. The combination of increased user numbers and revenue as well as improved profitability should ultimately lead to volume and profits.
Roku still has a wide-open runway to expand globally, and that’s what it’s focusing its energies on now. This strategy partly explains why average revenue per user (ARPU) has stagnated. Roku is adding members in foreign markets at a faster rate than its advertising business in those markets is growing.
Several catalysts could push Roku stock higher this year. The advertising industry is seeing a rebound, and with its flagship platform, Roku should benefit from higher ad spending. It recently signed a deal with Trade office To simplify the ad buying process for advertisers, it is making progress in its international expansion.
Roku management said it expects sales to increase 16% year over year in the fourth quarter. If its earnings grow 16% in 2025, it will have $4.5 billion in 12-month revenue at this time next year.
If profitability continues to improve and investors gain confidence about Roku’s prospects, the price-to-sales ratio should rise. Right now, it’s at a low of 2.7, but before the stock’s decline last year, it was above 4. With annual sales of $4.5 billion and a price-to-sales ratio of 4, Roku’s market cap would be $18 billion. This is approximately 80% higher than today.
If the company’s growth accelerates or the market becomes enthusiastic enough to give it a higher valuation, Roku stock could easily double in the next 12 months.
There’s no guarantee these things will happen, but the company’s stock’s lackluster performance in 2024 wasn’t built on long-term issues. As those devices thaw, the market may finally be ready to embrace Roku again in 2025.
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Jennifer Seibel He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku, The Trade Desk, and Walmart. The Motley Fool has Disclosure policy.
