From 2016 through 2021, Roku (ROKU 1.36%) increased revenue and gross profit by 593% and 1,064%, respectively. And despite falling precipitously from its all-time high, the stock has still produced a return of 118% since October 2017. But like most companies right now, Roku has seen its growth slow, and it faces some serious headwinds that are having a huge impact on the business. 

Investors should pay close attention to what's going on. Is now the right time to buy shares in this leading streaming platform? 

Facing headwinds 

As have many other businesses, Roku has been dealing with higher input costs recently from ongoing inflation and supply chain challenges. And this directly affects the company's hardware segment, which accounted for 11.9% of overall revenue in the latest quarter. Over the past five quarters, Roku has generated a negative gross margin on the sale of its media sticks, choosing not to pass on higher costs to customers. 

Management has decided to intentionally lose money in its hardware segment with the goal of continuing to attract new users onto the platform, and it's been working. As of June 30, Roku counted 63.1 million active accounts, up 14% year over year. And this figure has gone up in each of the past five quarters, demonstrating that management's decision was the right one. 

As the macroeconomic picture continues to weaken, the digital advertising market is slowing down as well. The bulk of Roku's revenue (88.1% in the second quarter) comes from its platform segment, which generates revenue by selling ad inventory to businesses looking to reach a wide streaming audience. If executives believe that a recession is on the horizon, why spend on marketing initiatives when customers will be struggling and demand could fall?

Marketing expenses can be trimmed first when anticipating an economic downturn. This is evident by looking at the dominant players in the digital ad space. Alphabet and Meta Platforms reported revenue and earnings per share in their latest quarters that missed Wall Street analyst expectations. 

"We believe this pullback mirrors the start of the pandemic in 2020, when marketers prepared for macro uncertainties by quickly reducing ad spend across all platforms," Roku CEO Anthony Wood said in the latest shareholder letter.

Not only did management withdraw full-year guidance, but it also expects just 3% revenue growth in the third quarter. The bright spot for investors, however, is that I believe Roku will be able to overcome these challenges. 

A sizable opportunity 

It's not all negative news. Roku currently holds the top spot in market share for smart-TV operating systems (by viewing time) in North America at 41%. That's a powerful position to be in today. And those 63.1 million active accounts streamed 20.7 billion hours of content during the second quarter, which was up 19% compared to the prior-year period. A valid argument can be made that streaming on Roku's platform could increase even more in a recessionary environment, as consumers cut back on spending and stay at home more often. 

Roku provides obvious value to all of its stakeholders. Consumers can view all of their streaming services on one simple and easy-to-use interface. Content companies, such as Netflix and Walt Disney, can reach a broad audience. And businesses that want to advertise can use Roku's platform to do so. It's a three-sided ecosystem where all parties benefit. 

In addition to being the clear leader in the industry today, Roku still has a big opportunity to continue growing in the years ahead. According to Statista, there are 1.3 billion broadband households worldwide and 110 million in the U.S., meaning lots of untapped potential for Roku to have a presence in more living rooms across the globe. 

And according to the company, 50% of TV viewing time is devoted to streaming, whereas only 22% of advertising budgets are dedicated to it. As more dollars transition from linear TV to connected TV, Roku should benefit tremendously. 

Its strong competitive position and meaningful growth runway are good reasons to like the business. And with the shares down 77% in 2022, Roku's stock is now trading close to its lowest price-to-sales multiple ever. Investors should consider buying shares today.