Prediction: Roku Stock Will Double This Year

The S&P 500 just finished another blowout year, highlighting 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's also an average, which means any of its constituents could be performing much better, or much worse.

Roku (NASDAQ: ROKU) is a popular stock and industry leader that isn't 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 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's negativity and doubles in 2025.

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Why the market's down on Roku

Roku hasn't had much trouble growing its platform recently. It went through a period of lumpiness after the pandemic accelerated its growth, but both its device and platform businesses are now growing at double-digit percentage rates. It actually got off to a great start last year before plunging. Among the reasons that the market soured on Roku in 2024 were:

• Walmart said it would acquire Roku competitor Vizio. The deal was announced last February, but didn't close until last month.
• Roku delivered mixed results for the fourth quarter of 2023.
• Its average revenue per user hasn't budged for the whole year.
• It's still reporting heavy losses.
• Ad sales have been under pressure due to inflation.

Why things could shift quickly

Walmart's purchase is complete, and it doesn't seem like Vizio is going to topple Roku from its industry-leading spot. Roku remains the No. 1 streaming platform operator in the U.S., Canada, and Mexico, and it sold more devices in the third quarter than the next two platforms combined. That's a strong lead, and as it pads its moat with innovations and partnerships, it should continue to hold the premier position.

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 forecast that it will report a tighter net loss in the just-ended fourth quarter. The combination of increasing user numbers and revenue plus improving profitability should eventually lead to scale and profits.

Roku still has a wide open runway to expand internationally, and that's what it's focusing its energies on right now. That strategy in part explains why its ARPU has been stagnating. Roku is adding members in foreign markets at a faster rate than its ad business in those markets is growing.

How Roku stock could double this year

Several catalysts could push Roku stock higher this year. The ad industry is on the rebound, and with its leading platform, Roku should benefit from higher ad spending. It recently signed a deal with The Trade Desk to simplify the ad-buying process for advertisers, and it's making progress on its international expansion.

Roku management said it expected sales to increase by 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 at this time next year.

If profitability continues to improve and investors gain confidence about Roku's prospects, its price-to-sales ratio should rise. Right now, it's at a low 2.7, but before the stock plummeted last year, it was above 4. With an annualized sales figure of $4.5 billion and a price-to-sales ratio of 4, Roku's market cap would be $18 billion. That's almost 80% higher than it is today.

If the company's growth accelerates or the market becomes enthusiastic enough to give it an even higher valuation, Roku stock could easily double over the next 12 months.

There's no guarantee that 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 be finally ready to embrace Roku again in 2025.

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Jennifer Saibil 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 a disclosure policy.