Can Roku Stock Beat the S&P 500 Between Now and 2030?

Though the broader market has been having a strong year, it has been a different story for Roku (NASDAQ: ROKU). The streaming platform enterprise's shares are down thus far in 2024. But investor sentiment about the company has improved drastically in the past couple of months.

Can this growth tech stock outperform the S&P 500 (SNPINDEX: ^GSPC) between now and 2030? Let's look at the bull and bear cases for Roku to figure out if shares can produce a better average annual return than 10%, which is about what the broader index has averaged historically.

Positioned to ride the streaming wave

Roku operates a steaming platform that aggregates an array of subscription services for its viewers. Roku also allows advertisers to use its technology to target various demographics within its audience. At a high level, this business is in a favorable position to benefit from the ongoing cord-cutting trend.

In 2010, 105 million U.S. households had cable subscriptions. That figure has been cut in half to about 53 million today. Consumers continue to gravitate toward the better experience and lower costs of streaming. What's more, because there are so many streaming video services available, Roku's value as a one-stop shop that allows a viewer to browse through them all in one place is obvious.

Roku has been riding the secular trend in streaming, but it still has a lot of room to grow. Currently, 83.6 million active accounts are using its platform -- but there are nearly 800 million broadband-enabled households worldwide. If it could ultimately reach a point where even a quarter of them have Roku accounts, that would give it a massive financial upside.

As more eyeballs move to streaming and more viewing time is spent there, Roku can attract more ad spending to its platform. This creates the potential for it to hopefully become a highly profitable business one day as Roku aims to better manage its expenses.

The stock was once a Wall Street darling -- its shares catapulted almost 2,000% higher from their IPO in September 2017 to their peak in July 2021. However, they have tanked since then, and are now down 84% from that all-time high. At this point, the valuation is compelling at a price-to-sales ratio of 3, which is less than one-third of Roku's historical average ratio.

At the mercy of big content companies

Most major streaming services are compatible with Roku's platform, allowing them to leverage it to reach Roku's large user base. Investors are certainly familiar with the top names in producing streaming content, like Netflix, Walt Disney, and Warner Bros Discovery. They spend billions of dollars to develop and license content to attract subscribers.

The issue, however, is that Roku likely has limited negotiating leverage with these content businesses. In other words, Roku needs them to cooperate more than the other way around.

For example, I'd suspect that if Netflix, Disney, or Alphabet's YouTube all chose not to offer their services through Roku, they'd likely not take much of a hit. They have the power because of just how big their own subscriber bases are and how well-known the brands are. I'd be surprised if Roku generated any meaningful amounts of revenue for them.

Roku might be categorized as a growth business, but its profits in recent years have been nonexistent. For the past two quarters, the business posted a combined net loss of $85 million. Management is focused on cost-cutting measures, but it could be a while until it can deliver earnings consistently, which adds an element of risk to the equation for shareholders.

Investors also shouldn't ignore the competition Roku faces in its niche. It has a strong market position among providers of smart TV operating systems, but it's going up against some deep-pocketed tech heavyweights including Alphabet, Apple, and Amazon. These formidable opponents will continue to make things difficult for Roku to expand its footprint.

The bear case for Roku is certainly compelling, but I think there are solid reasons to be bullish on its chances to outperform the S&P 500 over the next six years.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Neil Patel and his clients have positions in Walt Disney. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Netflix, Roku, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.