In the most recent quarter (ended June 30), streaming platform Roku (ROKU 5.41%) reported revenue of $764.4 million, up 18% year over year, and a loss per share of $0.82, compared to a $0.52 profit in the second quarter of 2021. Both figures were below Wall Street estimates. What's more, Q3 revenue guidance of $700 million was substantially below the $902 million that analysts were forecasting.
As a result, Roku's shares dropped a whopping 25% immediately following the announcement. But despite the negative reaction, I think it's the best streaming stock to own right now.
Still a strong quarter
Even considering the fact that Roku's Q2 performance disappointed Wall Street's expectations, I still believe it was a solid quarter. The three key performance indicators that investors should look at to gauge how well the business is doing were all positive. In the most recent quarter, Roku was able to increase active accounts 14%, streaming hours 19%, and average revenue per user 21% year over year -- all signs of continued growth following huge gains posted during 2020 and 2021.
Nonetheless, Roku will face some headwinds in the near term that shareholders must be aware of. In a shareholder letter, CEO Anthony Wood and CFO Steve Louden highlighted some of those headwinds:
In Q2, there was a significant slowdown in TV advertising spend due to the macro-economic environment, which pressured our platform revenue growth. Consumers began to moderate discretionary spend, and advertisers significantly curtailed spend in the ad scatter market (TV ads bought during the quarter).
And ongoing inflationary pressures mixed with supply chain concerns have resulted in lower TV unit sales. Management has decided not to pass on higher costs to customers, instead favoring account growth, which has resulted in a negative gross profit of $22 million for the hardware segment in the latest quarter.
The bright spot is that these issues aren't specific to Roku's business. Other companies that rely heavily on digital advertising, like Meta Platforms and Twitter, reported results that support weakening trends in the overall ad industry.
Additionally, supply chain challenges have been plaguing the entire global economy for quite some time now, hurting businesses that sell physical goods. Major retailers like Walmart and Target were forced to implement price markdowns to push excess inventory that they worked hard to acquire earlier in the year, depressing margins.
That said, it appears as though Roku's problems are short term in nature and should work themselves out over time.
Benefiting from the growth of others
What makes Roku a solid investment is how well it's positioned to gain from the growth of the whole streaming industry regardless of which individual streaming service ends up with the most customers. Compared to a content producer like Netflix or Walt Disney, Roku's agnostic platform benefits tremendously as more households ditch their traditional cable TV subscriptions in favor of streaming.
According to eMarketer, just 42.4% of U.S. households will have a legacy cable TV subscription in 2026, down from 52.4% in 2022. And Roku, being the top smart TV operating system in the U.S., is set to bring on these households as active accounts.
Plus, as marketers continue realizing the advantages of advertising on a connected-TV platform like Roku, the company's revenue will rise. According to data from Nielsen, just 22% of ad budgets were allocated to streaming TV, while 50% of U.S. TV viewing time for those ages 18 to 49 went to streaming. The closing of this gap should be a boon for Roku.
Another important advantage that Roku possesses deals with cash outlays. Netflix is set to spend $17 billion in cash on content this year alone after spending $17.5 billion in 2021. Producing high-quality series and movies is extremely expensive, and Roku avoids this by aggregating different content providers to offer its subscribers a rich viewing experience.
As Warren Buffett once said, "The best business is a royalty on the growth of others, requiring little capital itself." Roku is a great example of this.
Compelling valuation
Given the weaker-than-expected Q2 financial results, coupled with the rising rate environment that has crushed growth tech stocks in 2022, it's no wonder that Roku's shares are down an incredible 86% from their peak in July 2021. The stock now carries a price-to-sales ratio of 3, near the lowest level it has traded at since the business went public almost five years ago.
For investors who are able to stomach the near-term headwinds and can instead keep their focus on the bigger picture of streaming entertainment taking over, Roku looks like a solid buy right now.
