The darkest cloud at Roku (ROKU 3.51%) burst on Wednesday, and thankfully for shareholders it turned out to be a piñata. Roku stock soared 18% for the trading day, moving sharply higher after the company announced it had entered into a multi-year contract with Alphabet's (GOOG 0.56%) (GOOGL 0.42%) Google to keep its YouTube app on the streaming platform. The deal also includes the return of YouTube TV to Roku's offerings.
Coming together a day before the original deal was set to expire isn't exactly a surprise. YouTube had a lot to lose, and Roku had even more to lose.
The rally doesn't necessarily have to end here. Even after Wednesday's surge the stock finds itself trading 48% below the all-time high it hit this summer. Put another way, the stock would have to nearly double to establish a new peak. Can Roku get there in the year ahead, trouncing the market in the process? The answer is complicated, but potentially promising.
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Partying like it's 2022
Sharp drawdowns come with the territory of owning Roku. I shared them a couple of weeks ago when pessimism was running thick on the streaming video pioneer. It's seemingly an annual rite for a company that's only been public for a little more than four years:
- The stock fell 61% between October and December 2018.
- Roku tumbled 43% within a month of hitting a new high in September 2019.
- There was another 61% crash between February 2020 and the pandemic-fueled sell-off a month later.
- When the stock briefly broke below $200 on Monday it had fallen 60% from the all-time high it hit in July.
It's not for the timid. Every year has seen a sell-off of at least 43%, and in all but one of those years the drawdown has approached 60%. However, as I also pointed out earlier the stock has managed to hit a new all-time high every year:
- 2017: $58.80.
- 2018: $77.57.
- 2019: $176.55.
- 2020: $363.44.
- 2021: $490.76.
Nearly doubling from here in the next few months sounds woefully optimistic, but that's exactly what the stock has done every year. All good streaks can be broken, of course. Striking a new deal with YouTube -- just as it eventually played nice with HBO Max and Peacock -- makes a few things clear. Roku will negotiate to make sure it's a one-stop shop for smart-TV owners. Any service that wants an audience will have to play nice with Roku, as it commands nearly twice the market share of its nearest competitor in your living room.
The challenge right now is that YouTube may have been the darkest cloud, but just because it was ultimately stuffed with candy doesn't mean that the skies are clear now. Roku has a commanding presence in 56.4 million homes, but the 1.3 million sequential increase in active accounts that it posted in its latest quarter is its weakest showing in years. Consumption is also lower than it was two quarters earlier.
Moving on to the hardware end of the business, things are a little less appetizing. Player revenue posted a 26% year-over-year decline in its latest quarter, and margins are getting squeezed as rising input costs and supply-chain constraints do their worst. The good news there is that like any near-term constraint challenge the supply chain issues should prove transitory. Inflationary pressures are another story. They can't necessarily be passed on to consumers in this competitive climate, but there's a silver lining there. Average revenue per user has soared 49% at Roku over the past year. In short, it has the means to make up for the profit it's sacrificing on the initial dongle sale.
Did Roku stock bottom out on Monday? Are we at the start of the next big bounce for a leader among streaming-service stocks? Only time knows the answers, but history and momentum are on the side of Roku.
