With the S&P 500 facing major headwinds, growth companies are now feeling the bear market. Still, the lockdown days of the pandemic show just how high certain companies and their share prices can climb.
Consider Roku (ROKU -1.38%), which dominates the North American smart TV market. The company attained strong profitability and a soaring share price during 2020 and 2021, only to see its earnings and stock come back down to Earth.
But signs point to better times ahead as consumers rein in discretionary spending and look for cost-friendly alternatives -- and as the company also looks to expand further worldwide. Let's see why now might be the time to consider Roku shares.
A platform, a player, and a streaming service
Roku's biggest advantage seems to lie in its place as an operating system (OS) instead of a stand-alone streaming service. This helps it avoid direct competition with Netflix, Hulu and similar content providers. Because the operating system pairs with many different TVs and also comes to homes through the Roku stick or stand-alone streaming devices, it isn't tied to a single brand. This gives Roku an advantage over the current worldwide OS leader, Tizen, which belongs to and powers most of Samsung's current smart TV offerings.
Roku's player sales have proven less profitable than its OS, failing to reach profitable sales per unit since launch, but the research and development of those platforms drives OS compatibility, a major selling point for the company's offerings.
Meanwhile, the Roku Channel -- the free streaming service available through the Roku OS -- announced key partnerships with MSN to bring local news to viewers. The company also signed a deal with Walmart, allowing sales directly through the platform and its players. Increasing such forms of monetization remains a top concern among investors.
Strong market position despite sales cooling
Roku's operating system maintains a strong share of the market, spurred on by early pandemic sales, and continues to catch up to Tizen worldwide. The NPD group announced that Roku OS pulled off two years of top sales for the United States in both 2020 and 2021, outselling Tizen-based Samsung systems and allowing it to continue to put pressure on the current leader. Roku OS dominates the North American market with around 300% the population reach of Tizen.
The San Jose, California–based company appears ready to take on South Korea's Samsung and other major competitors in a worldwide market in the years to come. Roku recently announced a partnership with Chicago-based Aiwa to bring its Roku TVs to Mexico, where the OS already enjoys top market share for streaming. Other partner brands entering the Mexican market include Roku TVs from Japan's Sansui and even South Korean brand Daewoo.
As these partnerships strengthen, they'll likely create a better position to take the service farther abroad.
Continuing innovation and partnerships
Roku's service-agnostic design enables near-seamless interfacing with Apple TV, Google Home, Siri, and Amazon's Alexa. Roku OS also provides one of the few non-Apple methods of accessing Apple Music on a TV or other home media device. This versatility gives Roku an advantage over other OS competitors, such as Android TV -- and the innovation continues.
Looking further into the August earnings report, research and development accounted for $196 million in operating expenses, a number nearly twice that of the total loss from operations. This shows that the company doubled down on moving forward, even when revenue couldn't fully offset that cost in the short term. This commitment to continued innovation and expansion into new markets lays the foundation for a positive future at Roku.
Investing in growth in a bear market
No doubt, the plummet from profitability back into the red has likely made investors wary of Roku, and the company appears to recognize the need to do better, stating in August's letter to shareholders, "We will remain focused on growing our market leadership by further advancing our technology and brand, and continuing to execute our strategy."
Roku's shares may not offer much in the way of a short-term gain, but the potential for growth over time definitely remains. Now might be a good time to get in at low share prices as that strategy begins to turn things around and the next few years show whether this growth stock sits ready to beat the bears.
