Shares of fast-growing companies have been getting hammered over the past couple of months. A combination of the Federal Reserve's plan to tighten monetary policy in 2022 and the looming threat of decelerating growth coming out of the pandemic could be reasons these stocks are under pressure.
Roku (ROKU 6.62%) is the poster child of the current environment. Since hitting an all-time high of $479.50 in late July, the stock has crashed a jaw-dropping 55%. Shareholders are right to wonder if Roku's stock can recover in 2022.
Keep reading to find out what's been going on with this streaming innovator and if next year will be nicer to its shareholders than 2021 was.
What's happening with the stock?
I believe there are three major factors that have caused Roku's stock to come tumbling down.
The company's second-quarter financial release kicked things off. During the three-month period, user engagement fell sequentially. Roku account holders streamed 17.4 billion hours of content in Q2, down from 18.3 billion in the first quarter. This is a business that benefited from stay-at-home orders during the pandemic, so as the world opens back up, investor concerns about slowing growth came to fruition.
Like most other companies today, Roku is also facing supply-chain challenges. "The global supply-chain disruptions will likely impact the overall holiday season in terms of shipping delays, product availability issues, and product price increases," founder and CEO Anthony Wood highlighted on the Q3 earnings call. For a company whose long-term success depends on selling more media players to drive account growth, the possibility of a weak fourth quarter is not good news.
And rising inflation over the past several months, resulting in a more hawkish tone from the Fed, has pressured high-growth stocks like Roku. The expectation of higher interest rates is generally a big headwind for businesses that carry nosebleed valuation multiples.
I'm still bullish on Roku's prospects over the long term, so what happens over a short time period is not my main focus. But with a stock that has cratered so much in 2021, I wonder what this coming year has in store for shareholders.
A positive outlook
For two important reasons, I do believe the business will continue to progress in 2022 and the stock will recover. First, the move away from traditional cable TV to streaming is a powerful and sustainable consumer shift. By 2025, the U.S. is projected to have 60 million pay-TV households, a sizable decrease from 100 million in 2015 and roughly 74 million today. And while the U.S. market matures, the rest of the world still has a long way to go when it comes to streaming penetration. Roku's push in countries like the U.K., Germany, and Brazil highlights its international ambitions.
Second, as sales from Roku's high-margin platform business grow, profitability will increase. Organizations are increasingly looking to advertise to consumers via connected TV, a boon for Roku's prospects. Not only did the top 10 cable-TV advertisers double their spending on Roku's platform in Q3, but the business is attracting smaller companies as well, a trend that expands Roku's addressable market.
What's more, the burgeoning success of The Roku Channel should also boost Roku's ad revenue. It was a top-five channel on the platform in the quarter and is set to develop 50 new original series over the next couple of years.
There are some potential headwinds to Roku's positive outlook to bear in mind. The business could have another spat with a content company, such as its most recent face-off with Alphabet's YouTube. Further, the streaming industry's growth could slow down significantly as the pandemic surge continues to fade.
For long-term investors, however, these worries aren't anything to lose sleep over. The stock market overreacts to both positive and negative news. And in Roku's case, the extensive pessimism is fully priced into the stock now. After their massive loss in value this year, I think the chances are solid that Roku shares will bounce back strongly in 2022.