This has been a rough year for Roku (ROKU -3.05%) shareholders. Shares of the popular TV streaming platform have fallen around 45% since the start of 2021.
Roku's stock price performance in 2022 doesn't exactly jive with the ongoing transition from broadcast television to streaming video or the performance of the business. The strong secular trend toward streaming helped the company report eye-popping results for the last three months of 2021.
Why Roku shares fell
The stock market hasn't been punishing Roku because of a poor performance. Fourth-quarter revenue from the company's streaming platform soared 49% year over year.
Roku shares have been punished because stock markets don't deal well with uncertainty. The stock tanked in February because total fourth-quarter revenue that grew to $865 million was $20 million less than the low end of a guided range between $885 million and $900 million.
Image source: Getty Images.
Not hitting a quarterly revenue estimate that management provided one month into a three-month period suggests nobody really knows what could happen next. The guidance for the first quarter of 2022 doesn't look great either with the company forecasting a net loss of $30 million instead of the profit investors were hoping for.
It's really not so bad
Before turning your back on this top streaming stock because it missed a quarterly revenue estimate it's important to understand how the company was caught off guard. In the fourth quarter of 2021, consumers were a lot less interested in buying new televisions than they were during pandemic-related lockdowns. This is why fourth-quarter Player segment revenue fell 9% year over year.
Roku makes so much money selling advertising space on its streaming platform that it usually sells TVs and streaming sticks at cost. In 2021, pandemic-related supply chain issues began leading to minor losses for the Player segment of its business as the company absorbed rising expenses.
| Metric | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 |
|---|---|---|---|---|---|
| Player revenue | $178.7 million | $107.7 million | $112.8 million | $97.4 million | $161.7 million |
| Player gross profit (loss) | $4.6 million | $14.8 million | ($6.7 million) | ($14.6 million) | ($45.9 million) |
Data source: Roku.
The cost of manufacturing Roku hardware skyrocketed in the fourth quarter. The company absorbed the difference to avoid losing business and it worked. Even though Americans spent a lot less time at home in late 2021 than they did in late 2020, Roku reported active accounts and steaming hours that rose 17% and 15%, respectively, in the fourth quarter.
The supply chains that used to keep Roku devices inexpensive weren't built overnight and they probably won't recover from pandemic-related pressures overnight either. That said, heavy losses from the hardware side of the business are most likely temporary.
Why Roku's a great stock to buy now
The rapid decline of cookies and other means of tracking individual behavior online should give the type of ads that Roku serves TV streamers a boost in demand from advertisers already accustomed to operating online. This isn't the only secular tailwind pushing this stock forward.
It's just a matter of time before all TV is streamed on-demand instead of broadcast on a schedule. Nielsen found Americans between 18 and 49 spent 45% of their TV time streaming, which was 5% more than a year earlier.
Even though a majority of overall TV watched in America this year will be streamed, less than one-fifth of television advertising budgets are spent online.
In addition to more viewers than legacy TV, Roku offers advertisers advanced targeting capabilities. With Roku Pay, viewers can even purchase the thing they see advertised without getting up. This partly explains how the amount of revenue each Roku user generates rose 43% year over year in the fourth quarter to $41 per user. Average revenue gains are especially encouraging because the company is still executing its land and expand strategy in territories outside of North America.
Roku TV owners might have a hard time getting up after watching so much TV but this company's stock price should have no problem rising faster than the overall market over the long run.
