Constrained supply chains, coupled with unprecedented government stimulus to help the economy through the pandemic, have led to record inflation in the U.S. To fight this situation, the Federal Reserve has gone on a tightening path, aggressively hiking interest rates. The result has been market turmoil.
In particular, growth tech stocks, such as Roku (ROKU -1.39%), have gotten absolutely obliterated. The leading streaming platform's share price is trading at low levels it hasn't been at in over three years. So what gives?
Let's take a look at both the bull and bear cases for Roku, which should help investors learn about the business.
What the bulls say
Roku bulls point to the secular shift away from traditional cable TV and toward streaming entertainment as a key reason to like the company. Netflix's monster growth over the past decade spearheaded this change in consumer behavior to streaming, which is a more user-friendly, affordable option, not to mention the unlimited number of shows and movies available. According to Statista, there will be 57 million pay-TV households in the U.S. in 2026, down from 101 million in 2013. Unsurprisingly, many of these homes will migrate to Roku's offering.
Roku has helped to drive the cord-cutting movement as it currently has the No. 1 market share for smart-TV operating systems in North America, at 41% as of Q4 2021. From a viewer's perspective, it's incredibly valuable to have the various streaming services all accessible in one place, a capability Roku provides.
As of June 30, the company counted 63.1 million active accounts, up 14% year over year. What's more, customers watched a whopping 20.7 billion hours of content on Roku's platform in Q2, up 19% year over year.
And perhaps most obvious to the bull case for why one should invest in Roku right now is the fact that the stock has cratered. Just this year alone, it's down 74%, trading at just under $60 per share. The stock hasn't been this cheap since April 2019. A valid argument can be made that the pessimism surrounding the business and its stock price has never been higher.
Bulls think it's time to get aggressive and pounce on this buying opportunity.
What the bears say
Roku's naysayers immediately call out how unprofitable the enterprise is. Since going public in September 2017, the company has only been profitable in 10 (out of 26 total) different quarters. For all of 2021, Roku was comfortably in the black, but shareholders can't expect those robust conditions to persist forever. The company benefited from consumers who were still hesitant to leave their homes, as well as a rebounding advertising market.
Also, while Roku has the leading market share, competition is fierce. The most formidable opponent is Alphabet. The tech giant has its own competing product and operating system, the Chromecast and Android TV, respectively, while also offering customers YouTube and YouTube TV, its live-TV service. Additionally, Alphabet possesses top-tier expertise when it comes to digital advertising, thanks to the remarkable success and dominance of Google Search.
Furthermore, the softening macroeconomic environment is causing big marketers to trim their budgets, which has a direct impact on Roku's business. Roku generated 88% of its Q2 2022 revenue from high-margin platform fees, and these consist mainly of advertising revenue. As corporations plan for a recession, cutting marketing spending will be one of the first things on the list of priorities.
Bears believe that these issues are important reasons to avoid owning the stock right now.
What should investors do?
Taking everything into consideration, I think the bullish arguments outweigh the negatives. Not only is the stock trading at just about its cheapest valuation in its entire public history, based on the price-to-sales multiple of 2.7, but the bear case centers around problems that Roku can overcome.
The concern around company profitability should work itself out over time. Roku is still investing heavily in growth initiatives in an attempt to increase the user base and get more viewers on the platform as quickly as possible. So achieving profits isn't management's priority at this moment.
And as for competition from Alphabet, Roku has so far shown an ability to continue keeping its lead in the market for smart-TV operating systems. If active account growth stalls, which it hasn't yet, it might be time to start worrying.
But all in all, I think now is a fantastic time for those investors who truly have a long-term mindset to seriously consider scooping up shares in Roku.
