The frustration with Roku (NASDAQ: ROKU) stock continues. A key metric, average revenue per user (ARPU), remains frustratingly flat. Moreover, the stock never recovered from the 2022 bear market, making only modest gains over the last two years.
Traditional and cable TV are not yet dead, but they continue to cede viewership hours to the streaming industry spearheaded by Roku. So rather than giving up on the streaming company, investors should keep their faith in Roku stock for three important reasons.
1. The rise in streaming hours
Amid the high level of pessimism surrounding Roku stock, the company has continued to increase its influence over a growing streaming market. The nearly 86 million households actively using Roku grew 13% over the previous year. These users have spent more time on the platform, as streaming hours rose 20% to 32 billion.
Roku's No. 1 positions in streaming in the U.S., Canada, and Mexico drive much of these gains. Also, Roku's streaming devices and its branded TVs are available, affordable, and sold by most of America's top retailers, making it a convenient choice for consumers.
Additionally, much of this growth came from platform revenue, which drives most of the company's revenue through advertising and streaming services distribution.
Roku says a large share of its international markets are currently in the scale and engagement stage. Once those markets move beyond that period, ARPU could finally begin to rise, a factor that would probably drive Roku stock higher.
2. Free cash flow
Investors will often focus on Roku's continuing net losses. Admittedly, it would probably boost investor confidence if net income were positive. Still, upon closer examination, the $283 million in stock-based compensation in the first nine months of 2024, a non-cash charge, overshadows $93 million in net losses -- meaning Roku brings in more cash than it spends.
The $902 million in free cash flow in the first three quarters of 2024 confirms its improving financial stability and is up significantly from the $157 million in free cash flow reported during the same period in 2023.
That rising free cash flow means Roku can cover its costs and invest in itself, actions critical to sustaining the company's growth over time. Also, the net loss in the third quarter was only $9 million. That indicates Roku is in striking distance of becoming GAAP profitable in the foreseeable future, another hopeful sign for its financials.
3. Valuation
Furthermore, under current conditions, investors can buy stock in America's leading streaming company affordably.
As a company that is not yet profitable, it does not have a P/E ratio. However, its price-to-sales (P/S) ratio has dropped to 2.4. Interestingly, this is lower than the average sales multiple for the S&P 500, which now exceeds 3.
It is also a change from the 2021 bull market when Roku stock surged higher thanks to the temporary viewership increase from the lockdowns. At that time, the stock surged to a high of more than $490 per share, taking its P/S ratio briefly above 30.
Today, conditions are dramatically different, with a much lower P/S ratio and a stock 87% below its all-time high. While investors should not expect record-high stock prices anytime soon, they can take comfort in an expanded customer base that should profit the stock as Roku better monetizes its platform.
Investing in Roku stock
Ultimately, business growth should play into the hands of Roku stock bulls. Roku is steadily increasing its customer base and streaming hours, leading to considerable increases in its free cash flow. Consequently, new investors can buy Roku stock at a heavily discounted valuation.
Ongoing losses and flat ARPU growth appear to have undermined Roku stock in recent years and that has hurt its stock, at least for now. Nonetheless, Roku's market lead and improving monetization could eventually spark a new bull market in Roku stock, giving shareholders good reason to stay optimistic.
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Will Healy has positions in Roku. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.
