The S&P 500just finished another blowout yearhighlighting how much sense it makes for investors to park some money in index-based exchange-traded funds (ETFs). The S&P 500 is often used as a proxy for the market, but it only tracks 500 companies out of thousands. It is also an average, meaning that any of its constituents could be performing much better, or much worse.
A year(NASDAQ: ROKU) is a popular non-S&P 500 stock and industry leader, and in contrast to the market's strong performance in 2024, Roku's down year came down 19%. There were reasons for the market's negative sentiment about 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 growing its platform lately. It went through a bumpy period after the pandemic accelerated its growth, but its device and platform businesses are now growing at double-digit percentage rates. In fact, he got off to a great start last year before plunging. Reasons the market soured on Roku in 2024 included:
Walmart said it would acquire Roku competitor Vizio. The agreement was announced last February, but did not close until last month.
Roku had mixed results for the fourth quarter of 2023.
Advertising sales have been under pressure due to inflation.
The Walmart purchase is complete, and it doesn't look like Vizio is going to challenge Roku from its leading position in the industry. Roku remains the No. 1 streaming platform operator in the United States, Canada, and Mexico, and sold more devices in the third quarter than the next two platforms combined. That's a strong lead, and as it opens up its moat with innovations and partnerships, it should continue to hold the leading position.
The company has also made healthy progress in terms of profitability, with five consecutive quarters of positive free cash flow and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).
It is in an excellent cash position, and while the average view among Wall Street analysts is that it will not turn a profit in 2025, management has predicted that it will report a tighter net loss in the fourth quarter that has just ended . The combination of increasing user numbers and revenue along with improving profitability should ultimately lead to scale and profit.
Roku still has a wide open runway to expand internationally, and that's what it's currently focusing its energies on. That strategy partly explains why its ARPU has been stagnant. 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's stock higher this year. The advertising industry is on the rebound, and with its flagship platform, Roku should benefit from increased ad spending. He recently signed a deal with The Trade Desk to simplify the process of buying ads for advertisers, and is making progress in international expansion.
Roku management said it expects sales to increase 16% year over year in the fourth quarter. If it grows its top line by 16% in 2025, it will have $4.5 billion in trailing 12-month revenue this time next year.
If profitability continues to improve and investors gain confidence about Roku's prospects, its price-to-sales ratio should rise. Currently, it's at a low 2.7, but before the stock plunged last year, it was above 4. With an annual sales figure of $4.5 billion and a price-to-sales ratio of 4, Roku's market cap would be $18 billion . That is almost 80% higher than it is today.
If the company's growth accelerates or the market becomes enthusiastic enough to give an even higher valuation, Roku stock could easily double over the next 12 months.
There's no guarantee those things will happen, but the company's lackluster stock performance in 2024 wasn't based on long-term issues. As those melt away, the market may finally be ready to welcome Roku again in 2025.
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Jennifer Saibil does not have a position in any of the stocks mentioned. The Motley Fool has posts at Roku, The Trade Desk, and Walmart and recommends it. The Motley Fool has a disclosure policy.
