Where Will Roku Stock Be in 5 Years?

Roku has been experiencing significant growth in the streaming market, but its financial performance remains a concern. Despite being the leader in the U.S. streaming sector, Roku's stock has declined 57% over the past five years due to worries about its profitability. Nevertheless, as Roku continues to grow, the current stock price appears to be at its lowest in years, creating curiosity about its future potential.

Streaming TV Growth Continues

Roku operates in a dynamic sector where streaming video is still on the rise. Reports from Nielsen highlight that streaming currently constitutes just 41% of TV viewing in the U.S., with expectations of this number nearing 100% in the next decade or two. Roku captures a significant share of U.S. TV viewing. In addition to partnering with third-party streaming services like Netflix, the company has developed its own free streaming platform, the Roku Channel, which has grown to represent 1.6% of all U.S. TV viewing. The Roku Channel is reportedly the third most popular app on the Roku platform, and streaming hours on the channel surged by 80% year-over-year last quarter.

This increase in viewing hours, particularly on the Roku Channel, contributes to Roku's ongoing revenue growth. Recently, the company reported a 15% rise in platform revenue, reaching $908.2 million, with impressive gross margins of 54.2%. This growth is primarily fueled by advertising and promotional campaigns across its systems.

Improving Profit Margins

While Roku's stock struggles, its revenue has soared by 232% over the past five years. However, the challenge lies in improving its profitability, as the company reported an operating loss of $600 million over the last year, continuing a trend from previous years. Fortunately, recent quarters indicate that Roku is making progress, with the latest operating margin narrowing to -3%, nearing break-even.

Investors should pay close attention to Roku's operating margin moving forward. If the company can sustain revenue growth while improving its margins, it may eventually turn profits into sizable earnings.

Future Stock Predictions

The trajectory of Roku's stock in the coming five years hinges on its profit margins. With the ongoing global transition to streaming, Roku's revenue growth appears assured. Last quarter, the company experienced a 16% increase in total revenue, suggesting that an annual growth rate of around 10% is achievable over the next five years, potentially bringing revenues to $6 billion in that timeframe.

A crucial question remains: what will profit margins look like? Given the overall gross margin of 45%, it is conceivable that Roku might reach a bottom-line profit margin of around 10% at a larger scale. This could translate to approximately $600 million in annual profits based on projected revenue.

Currently, Roku's market capitalization stands at $9 billion, indicating a forward price-to-earnings (P/E) ratio of about 15 over the next five years. While this figure seems attractive, it is close to the long-term market average. If Roku's stock does not command a higher earnings ratio in five years, it may not show significant gains based on these projections.

Therefore, unless investors believe Roku can exceed a 10% annual revenue growth rate or expand profit margins beyond the 10% mark, the stock may not be a compelling buy at this time.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has holdings in and recommends Netflix and Roku.

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