Shares of Roku (ROKU -0.63%) turned lower Tuesday, declining as much as 5.8%. As of the market close, the stock was still down 3.4%.
The catalyst that sent the streaming pioneer tumbling was a prediction by a Wall Street investment bank regarding the near-term future of the ad industry.
If a recession occurs, it could cause Roku's revenue to fall next year, according to a report by analysts from William Blair. They predict a decline in overall ad spending in 2023. Fears of a potential recession are fueling a pullback in global advertising spending. The firm forecasts it will decline between 2% and 8% next year.
The analysts suggest that Roku's platform could be among the hardest hit, as advertisers tend to rein in spending -- particularly on "brand building" ads -- during recessions. They go on to suggest that spending on those types of ads doesn't "provide instantaneous returns during a recession," in contrast to the so-called "performance advertising" featured on major online platforms. The effectiveness of advertising on streaming video platforms, they assert, is not as well understood as the value of putting ads on Google or Meta, for example.
As a result, in their worst-case scenario, they think Roku's ad revenue could decline by 12% in 2023.
But the news wasn't all bad. In their best-case scenario, Roku's revenue might increase by as much as 12%. The analysts further suggested that without a recession, Roku's advertising revenue would jump by 22% in 2023.
Roku has been hit by a perfect storm. People are resuming more of their everyday pre-pandemic activities (and streaming less video), it faces tough comps, and supply chain issues have weighed on the company's growth. Yet each of these headwinds is short term in nature. And the analysts' estimates are just that -- estimates.
With more than 63 million active accounts, Roku remains the leading streaming video platform, aggregating viewers' paid subscriptions and ad-supported streaming options all in one place. Furthermore, it has become adept at squeezing the most possible revenue out of each additional viewer -- its average revenue per user grew by 21% year over year in the second quarter.
Given Roku's dominance in its space, long-term investors should view these headwinds as temporary woes that will eventually give way to a return to higher growth.