No one ever complains that there's nothing good to watch on TV anymore, and Roku (ROKU 1.75%) is a good reason for that. The company pioneered the TV streaming market, opening the floodgate for the plethora of video services we have today. You would think that today's entertainment climate -- where folks are consuming content on their own terms -- would be fertile soil for Roku. The stock chart tells another story.
Shares of Roku have plummeted 86% since peaking at nearly $500 in July of last year. What went wrong? Can the company turn its fortunes around? Everybody's talking about Roku. Let's break down the chatter.
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TV dinner
If someone was to spell out the bearish possibilities for Roku last summer as the shares were peaking, it's easy to smoke out the potential doomsday scenarios. With COVID-19 vaccinations available, surely we would be spending more time outside of our homes and streaming less. That did not play out. There were 63.1 million active Roku accounts by the end of June, a 14% increase from last summer when the stock was hitting all-time highs. We're also streaming more -- not less -- now, as the 20.7 billion hours streamed through Roku's operating system in its latest quarter is a 19% year-over-year increase.
A more recent bearish knock is that companies that rely on advertising revenue will suffer as the economy softens. It's a fair point, and the majority of Roku's revenue comes in the form of connected TV ads. Things may very well deteriorate on that front in the near future, but for now Roku is killing it. Average revenue per user is up 21% over the past year.
NASDAQ: ROKU
Key Data Points
With active users, engagement, and revenue per user at their all-time highs, why is the stock near its two-year low? The answer lies deeper in Roku's income statement and in Wall Street's near-term expectations. Roku's margins have contracted over the past year. Supply chain constraints and cutthroat pricing have slammed it on the hardware end. Investments in content and growing its reach have narrowed margins on the platform end. Roku is no longer profitable and has posted a larger-than-expected loss in back-to-back quarters.
The near-term outlook is problematic. After posting a respectable 18% year-over-year increase in revenue for its latest quarter, Roku's guidance calls for a mere 3% uptick for the quarter that ends this month. This implies that the company is about to serve up its first sequential dip in average revenue per user. Roku also withdrew its full-year guidance this summer, and that's the kind of foggy uncertainty that sends investors scrambling for visibility elsewhere.
With recent analyst downgrades and Roku bracing investors for turbulence, it's easy to see why the stock has sold off sharply over the past year. The silver lining here is that the move could be overdone. If you think that streaming hubs are slugging it out for a share of the living room market, things are even more contested among streaming services. There's a pricing war among streaming video stocks, and Roku could be a beneficiary as those platforms ramp up their marketing budgets on Roku to stand out in a crowd. Roku will have to turn question marks into exclamation points to start moving higher, and now investors are just waiting for the company to finish its sentence.
