Shares of Roku (ROKU -0.43%), a leading streaming platform, have been absolutely hammered over the past 12 months. That sharp decline may make some investors automatically assume there must be something wrong with Roku's business. Jumping to that conclusion by simply looking at the stock chart -- without considering Roku's business performance and the broader context of the environment in which Roku is currently operating -- may, however, turn out to be a big mistake. Let's see why.
Global supply chain issues have been a drag on Roku's business
With its comprehensive ecosystem of Roku TV, streaming devices, and the Roku operating system, Roku has pioneered a convenient way for users to aggregate and access their favorite shows and movies from a variety of content providers. The past 12 months, however, have presented an unfriendly environment for Roku's business, and topping the list of issues is the broken global supply chain:
- For over four quarters now, a shortage of components has resulted in increasing TV prices and decreasing sales of TV sets, with sales volumes lower than even their 2019 pre-pandemic levels. Lower TV sales mean a limited opportunity for Roku to grow its revenue.
- The supply chain issues and low inventories have also majorly impacted the auto and consumer packaged goods sectors, and as can be expected, companies in those sectors are having to pull back on their advertising spend on Roku's platform. Another blow to Roku's revenue potential.
- Another issue driven by the supply chain, although a relatively minor one, is the increase in component costs of Roku's devices. This has resulted in lower than expected revenue and gross profit for its player segment -- the one focused on selling Roku's hardware devices -- over the past few quarters.
Image source: Getty Images.
Global supply chain issues have been entirely beyond Roku's control, and these issues have wreaked havoc in every industry over the past year or so. Roku, to its credit, has been transparent about these challenges in the company's quarterly earnings calls for the past few quarters. And although the timing of when exactly the inventories will start to flow seamlessly is hard to predict, Roku expects these concerns to be temporary.
Lapping the pandemic growth isn't easy, but the results are still impressive
A big concern from many analysts about Roku has been its slowing growth. While it is true that Roku's growth has slowed down in the past four quarters, it is because the company pulled forward its demand during the pandemic, when it increased its revenues by 58% and 55% in 2020 and 2021, respectively. It is quite reasonable that the pandemic-fueled growth is now somewhat cooling off, when viewed in terms of year-over-year growth rates.
And yet, the company still increased its first-quarter 2022 revenue by 28%, which is quite impressive. What's even more exciting is that Roku's platform revenue -- the revenue it generates from advertisements on its platforms and by selling subscriptions to various paid services such as Netflix and Disney+ -- grew 39% year over year and is now 88% of the total revenue at the end of the first quarter.
Roku added 1.1 million new accounts in the quarter, reaching 61.3 million. Consumers also spent more hours watching on Roku's platform as streaming hours grew by 1.4 billion over the past quarter to 20.9 billion. And despite all the challenges, Roku was able to make more money per user -- reaching almost $43, a jump of 34% year over year.
Also, Roku's large long-term opportunity is still intact, as the advertising revenue for the connected TV segment in the U.S. is projected to more than double from $14 billion in 2021 to $29.5 billion in 2024, and Roku is likely to be one of the key beneficiaries of that trend. The company is also looking to replicate its success in North America in the other international markets, which further adds to its growth prospects.
So, while analysts may be unhappy about Roku's "slowing" growth, zooming out to look at the big picture suggests that it is more about the normalization of the demand in the short term than any breakdown of its business fundamentals.
Don't judge this book by its cover
Roku's shares are down by over 80% since their all-time high about a year ago, and that can be frustrating and scary. But Roku is not an exception. The current bear market has been brutal to the majority of the growth and tech stocks as inflation soared to historically high levels and the economic outlook is as uncertain as ever.
The headwinds discussed above along with the current market conditions may be putting pressure on Roku's share price in the short term but none of those factors point to a decline in Roku's business fundamentals. These factors are well beyond the company's control and, very likely, are temporary. It's actually quite impressive how well Roku has been able to navigate all the macro challenges and continue to grow at a very solid pace. Roku, the business, seems to be doing just fine.
Investors wondering if Roku is done and if they should sell their shares by just looking at its stock chart may be making a huge mistake. In fact, the current discount on its shares may be a great opportunity for long-term investors to consider taking a position in the company.
