Roku (NASDAQ: ROKU) has had a difficult three years. Shares are down 71% as of the Nov. 27 close. The communications services company was a big winner during the pandemic era, with many staying at home using the company’s streaming service. However, the 14% revenue growth last quarter is a far cry from the 81% growth it achieved in Q2 2021. The real question is whether the stock’s fall from grace is overexaggerated and if shares can make a comeback going forward.

Wall Street holds mixed views. Some see a +30% upside in the shares, while others believe the company is still overvalued. Below, I’ll dissect the company’s business and provide my ultimate take on Roku stock going forward in the intensely competitive streaming industry.

The History of Roku’s Business and Sustained Industry Strength

Roku's platform segment almost entirely drives its revenue. In Q3, it accounted for 85% of total revenue. Devices revenue made up the rest. Many may have initially heard of Roku through its small devices that customers connected to their televisions. It enabled access to many popular streaming services like Netflix (NASDAQ: NFLX). In 2015, device sales accounted for 84% of the company’s revenue.

The company expanded these offerings to include Roku Streaming Stick and Roku-branded TVs. The company has faced notable competition from Amazon’s (NASDAQ: AMZN) similar offers like the Fire Stick and Fire TV. Overall, revenue from its devices is basically flat since the end of 2019. However, it has experienced strong growth lately. Revenue from devices increased 39% in Q2 and 23% in Q3.

A more important metric to look at, however, is the company’s streaming households, as the company actually loses money on its devices. The figure has increased 13% since last year. This shows the company is continually getting more users to use the Roku OS. More streaming households increase the revenue for its platform segment, where Roku generated a significant gross profit margin of 54% last quarter.

In the platform segment, Roku sells advertisements and distributes streaming content services. Advertisers buy space to market to potential customers as they navigate Roku’s operating system, Roku OS. Roku also collects fees when a customer signs up for a streaming service, such as HBO Max. Roku also has its own free ad-supported content that sells more ads.

This increase in streaming households is largely because televisions sold with the Roku OS still dominate the market. In Q3, sales of TV units powered by the Roku OS were more than those sold by the second and third-largest operating systems combined. These are not sales from Roku-branded TVs but rather TVs made by other companies that integrate Roku OS. Due to this, they don’t fall into the devices revenue. Thus, I am not overly concerned with the devices segment as long as more eyeballs are on the Roku OS. However, it is still very good to see that Roku is predicting device sales will grow by 25% in Q4.

Roku’s Path to Profitability

The platform segment’s gross margin increased by over 600 basis points from Q3 2023. That bodes well for the company's future profitability prospects, as it still lost 36 million last quarter.

However, this is around one-tenth of the $350 million the company lost in Q3 2023 and around half of what it lost in Q2 2024.

It is on a good trajectory to profitability. However, the company expects its loss to widen to $65 million in Q4. This is due to increased holiday promotions and strong device sales growth, which are causing it to lose money. Again, I am not all that concerned as long as the Roku OS is getting in front of more people, which these initiatives are forwarding.

Roku Remains Underappreciated Despite Near-Term Headwinds

A more legitimate concern is the decrease in platform gross margins of around 200 basis points that the company is forecasting in Q4. This is due to decreased advertising demand from streaming services as they shift more toward profitability than growth. These ads are particularly high-margin, so less of them reduces the overall platform margin.

Still, Roku can likely find other high-margin advertisers to replace these sources over time. The company’s partnership with The Trade Desk (NASDAQ: TTD) may be able to do just that by making Roku's ecosystem a more desirable place for advertisers. Overall, I think the market underappreciates Roku’s massive user base and improved profitability, giving the stock the opportunity to break out in 2025.