Roku Inc. (ROKU) remains approximately 82% below its 2021 peak of around $473. However, the stock has appreciated by 20% over the past month and 44% over the last year. While recent gains—driven in part by renewed top-line growth—may appear to signal a potential turnaround, a closer look suggests caution is warranted. The company continues to face intense competitive pressures and a challenging advertising landscape. Additionally, ongoing reliance on stock-based compensation may be contributing to shareholder dilution. For these reasons, I maintain a Bearish outlook on Roku.
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What’s Driving Roku’s Recent Revenue Surge?
On the positive front, Roku’s revenue growth has resumed, increasing 17% year-over-year to $881 million in its latest earnings report. The company’s acquisition of Frndly TV for $185 million added about 200 basis points to revenue, bringing affordable live TV to its platform and boosting user engagement.
Moreover, strategic partnerships, such as a recent deal with Amazon (AMZN) for ad revenue, have also boosted numbers, with Roku’s 90+ million streaming households and surging streaming hours (127 billion last year) solidifying its U.S. market lead. Improved home screen ads and political advertising ahead of elections (gubernatorial and state legislative races in states like New Jersey and Virginia) are projected to keep this momentum going, with analysts forecasting 10-11% full-year revenue growth.
Market Headwinds Make Life Difficult for Roku
Despite these positive catalysts, though, there are real cracks in Roku’s business. While these positive developments, including acquisitions, partnerships, and ad innovations, are real, they’re built on a shaky foundation. Roku’s platform thrives on user growth, but keeping those 90 million accounts engaged without exclusive content is tough. The company is leaning hard on ad revenue, which is volatile, and its device segment often sells at a loss to drive platform adoption. The numbers appear encouraging, but they conceal deeper issues.
The ad market’s saturation adds fuel to the fire. Heavyweights like Netflix (NFLX), Disney+ (DIS), and Amazon Prime Video are expanding their ad offerings, crowding out Roku’s platform revenue, which relies heavily on ad dollars. All in all, ROKU’s average revenue per user remains stable while the number of active users is ticking up each quarter, according to TipRanks data.
The device business isn’t helping either. Despite an 11% revenue increase to $139.9 million in Q1, negative gross margins linger due to supply-chain snags and steep discounts. Operating expenses are projected to rise 10% year-over-year in Q2, putting the squeeze on profitability. Roku’s eyeing positive operating income by Q2 2026, but expanding to 100 million streaming households globally in the next 12-18 months is a tough ask in fragmented markets.
Stock-Based Compensation: A Hidden Value Destroyer
One could argue that Roku is in a much better position today, considering its boast of positive free cash flow, which has amounted to $303.8 million over the last 12 months. However, that’s a mirage. Strip out stock-based compensation (SBC), and the picture darkens. SBC remains a whopping 10% of revenue, dwarfing free cash flow. It’s actually quite puzzling that despite the company’s ongoing failure to build a profitable business, stock-based compensation remains near record highs, a situation that, frankly, feels quite disrespectful to shareholders.
But here’s the interesting part: ex-SBC, Roku is generating negative free cash flow, meaning the “positive” figure is propped up by issuing new shares, diluting existing shareholders. This erodes value on a per-share basis, as the share count keeps creeping up. In particular, Roku’s share count has increased by approximately 22% over the past five years, reflecting consistent mid-single-digit annual dilution.
So even with shares still trading at a seemingly low 2.8x sales multiple, this dilution is a slow burn. Roku’s $2.26 billion cash pile is also weighed down by $577.1 million in debt, and while the debt-to-equity ratio of 0.23 isn’t alarming, the constant share issuance is. Finally, substantial insider selling in recent months, including by CEO Anthony Wood, screams a lack of confidence. I think this setup makes Roku’s low valuation a trap, not a bargain.
What is the Prediction for Roku Stock?
Currently, most analysts are bullish on Roku stock. The stock has a Moderate Buy consensus rating, based on 13 Buy, six Hold, and one Sell ratings assigned over the past three months. However, ROKU’s average stock price target of $89.71 implies less than 2% upside potential over the next twelve months, suggesting that any meaningful upside may have already been priced in.
Roku’s Rally Masks Deeper Weakness
Roku’s recent rally may give the impression of a strong recovery, but I remain unconvinced. While last quarter’s revenue growth—driven by The Roku Channel and advancements in ad technology—was a positive sign, that momentum appears to be slowing. At the same time, the company continues to face significant challenges, including intense competition and a maturing advertising market.
Additionally, the company’s ongoing use of stock-based compensation has consistently outpaced free cash flow, leading to shareholder dilution and raising concerns about the strength of Roku’s underlying fundamentals. Although Roku may appear attractively valued at 2.8x sales, this recent rebound could be misleading. In my view, investors would be prudent to exit their positions before further equity dilution erodes value.