Roku (NASDAQ: ROKU) was a hot growth stock in 2021. And while its business is still growing, things have admittedly slowed down for the company. It has, however, expanded beyond just selling streaming sticks and those opportunities look to be putting it on track to generate $1 billion in quarterly revenue.
As interest rates declined, bullishness appears to be picking up, and Roku's stock is now up 35% in the past six months. Is there any chance for the streaming stock to get back to the all-time high of $490.76 it hit a few years ago?
The bullish case for Roku
Roku has a popular streaming platform that can make it easy for users to have one place to access all their varied streaming options. As content becomes more segregated, it's almost inevitable for cord-cutters to rely on more than just one streaming service, especially if they want to watch sports.
And this can be a big opportunity for Roku -- to become the preferred streaming hub for users. While there are competing options, demand has remained strong, with Roku continuing to generate impressive numbers. In the most recent quarter, which ended on June 30, net revenue rose by 14% to $968.2 million. The number of streaming households using its products rose by 14% while streaming hours increased by 20%.
Roku not only offers a way to consolidate pay services, but also makes it easy for people to access a lot of free content, including through its own Roku Channel. The company's streaming sticks make it easy for users to gain access to a wide range of content. And with streaming services continuing to rise in popularity and content becoming more fragmented, Roku may play a big role in the industry's long-term growth.
Plus, by branching out and offering smart devices, there's an opportunity to develop an ecosystem and entice users who are already using its devices for streaming to buy more products.
The bearish case for Roku
While Roku's business is certainly still growing, the problem is that it's doing so in an unsustainable way. Over the past four quarters, the company incurred an operating loss of more than $597 million, on revenue of $3.7 billion.
And while the business generated positive free cash flow of $320 million during that stretch, that becomes less impressive when you consider stock-based compensation totaled $367 million. If all that compensation were paid out in cash, the company's free cash flow would have been negative.
Exacerbating these challenges are the company's expansion efforts into selling TVs and smart home devices, including doorbells and plugs, for the sake of growth. By diversifying away from its core business and focusing more on hardware products, which generate worse gross margins than software, it may be more difficult for Roku to get back to profitability than if it were to focus on just its streaming sticks and operating system.
If the company can't prove to investors that it can be profitable while also growing its business, the stock's rally may not last for long.
Roku investors shouldn't count on a huge rally anytime soon
Back in 2021, streaming stocks and any businesses that could have benefited from stay-at-home orders during the pandemic were raging-hot buys. Roku's stock arguably shouldn't have ever hit $400, let alone higher than that. Even if the company continues to grow and returns to profitability, it seems unlikely it will get back to those highs anytime soon, if at all.
The company is facing a growing list of competitors in smart TVs and smart home products, which could make it more difficult for Roku to be a top growth stock in the future. And while it is still growing today, without a path to profitability, investors may be better off staying on the sidelines for now.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
