Is It Time to Give Up on Roku Stock?

When it comes to frustrating stocks to own, Roku (ROKU -0.64%) is likely near the top of the list for many investors. The stock is down by close to 90% from its all-time high of $490.76 per share, which it hit in mid-2021. Despite a growing user base and being on the leading edge of the consumer transition to streaming TV, the company has struggled to return to profitability. Knowing that, it is not unreasonable to ponder what investors should do. Should they throw in the towel and sell, or do shareholders need to give the company more time for its long-awaited turnaround? Image source: Getty Images. Why Roku holds its appeal For all of Roku's challenges, its business model holds tremendous potential for success. It sells devices at thin margins, or even at a slight loss, to draw viewers onto its platform. From there, content providers partner with the company to feature their streaming services on its platform, and advertisers are in turn drawn to its vast audience. The advertising business now generates most of the company's revenue. Investors' frustrations are likely exacerbated by Roku's market victories. Even though much larger rivals such as Amazon and Samsung have gained some market share in recent months, Roku has maintained its leadership position. In North America, nearly 40% of streaming households use a Roku device, according to Pixalate. With that, Roku states it is the No. 1 streaming platform in the U.S., Canada, and Mexico. It also claims that nearly 40% of TVs sold in the U.S. use Roku's operating system. Meanwhile, customers continue to shift from traditional TV to streaming options. That market share lead means Roku is the biggest beneficiary of this secular trend. This is critical because device revenue leads to platform revenue. And in the first quarter, Roku's top line rose a solid 16% year over year to $1.02 billion. Roku's challenges Unfortunately, Roku's continued growth has not returned it to the profitability it reached during the pandemic. Though its Q1 net loss of $27 million is well below the $51 million loss it reported in the year-ago quarter, the frustration continues for Roku bulls looking for stronger profitability. Roku stopped publishing average revenue per user (ARPU) starting in 2025, a move unlikely to reassure investors. While it publishes free cash flow figures, which have been positive for several quarters, the $298 million in Q1 free cash flow was down 30% year over year. Furthermore, the stock has reversed nearly all of its gains from the past year. As recently as February, Roku was up more than 60% over just nine months. That said, its price-to-sales (P/S) ratio is 2.1 as of this writing, down from over 30 in 2021. Despite being priced like a value stock rather than a growth stock, Roku has failed to draw more investor interest. Is Roku a sell? Even so, investors may still want to consider holding or adding shares at current levels. Admittedly, given the length of time this stock has stagnated, holding may be the last move shareholders want to make. But at its current rate of improvement, the company could finally turn profitable again on a net income next year. That should address a longtime concern with the business. Otherwise, Roku has become a value stock, reaching a level investors might have perceived as a rock-bottom valuation at one time. Assuming it can eventually reclaim a valuation more closely resembling that of a growth stock, one with a dominant position in a high-opportunity industry, Roku can still deliver considerable long-term returns. Thus, this is not the time to give up on the stock.