Roku is arguably in its best competitive position ever thanks to its increasingly larger user base. The company is not generally accepted accounting principles (GAAP) profitable yet, but it generates free cash flow and has $2.1 billion in cash and zero debt on its balance sheet. Yet, the stock trades near its lowest price-to-sales (P/S) ratio as a public company, just 2.5 times revenue.

It might sound odd to say out loud, but Wall Street seems to have trust issues with Roku’s business model. For example, investors sold off Roku stock after the company’s Q3 earnings due in part to management’s announcement that it would stop reporting its number of streaming households or its average revenue per user (ARPU). However, management’s explanation made total sense. The company’s international expansion is adding streaming users that Roku hasn’t yet monetized, which skews the data. Instead, Roku will focus on streaming hours (measuring platform engagement) and free cash flow (a key financial metric that drives business value).

Roku’s stock recently dipped again after adtech company The Trade Desk announced it would launch a smart TV operating software platform in 2025 that would directly compete with Roku’s. It’s worth remembering that Roku already has 85.5 million households using it versus zero for The Trade Desk. Roku is the top-selling TV operating system in North America, and it has been leading the U.S. market for more than five years. It seems questionable at best that TV manufacturers, especially those already using Roku’s TV operating system, will flee a known winner for an unproven newcomer.

It seems Wall Street doesn’t want to give Roku any benefit of the doubt, and that’s weighing on the stock today.

Analysts estimate Roku will finish 2024 at just over $4 billion in revenue, a 14% increase over last year. Estimates are $4.6 billion for 2025, implying 15% year-over-year growth. So, Roku is still growing solidly but probably not fast enough to turn modest sums into life-changing wealth anytime soon.

But Roku’s valuation is a wildcard. The stock’s depressed valuation is only a fraction of Netflix’s, which trades at a P/S ratio over 10. Should Roku prove itself enough to earn a higher valuation, double-digit revenue growth and valuation expansion together might create the needle-moving returns investors seek. Even trading at half of Netflix’s P/S ratio would require Roku’s share price to double from its current levels.

Will that happen? It’s anyone’s guess. Roku has proven itself enough that it’s an intriguing long-term investment idea with market-beating potential if the business can turn a profit and maintain its growth momentum. Going too far beyond that is probably reaching, so those hoping for a rags-to-riches story might look elsewhere.

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Justin Pope has positions in Roku. The Motley Fool has positions in and recommends Netflix, Roku, and The Trade Desk. The Motley Fool has a disclosure policy.

Could Buying Roku Stock Today Set You Up for Life? was originally published by The Motley Fool