The past two years have been a huge headache for Roku (ROKU +0.55%) shareholders. The once-hot stock faltered as a result of several factors, including the lifting of Covid-related lockdowns, global economic pressures, and increased competition from other streaming companies.
Roku stock is now down more than 84% over the past year. Is it finally time to buy?
Why the stock is down
Roku demonstrated enormous growth at the beginning of the pandemic. It has two operating segments: player revenue, which encompasses its hardware or streaming devices, and platform revenue, which comes mostly from advertising. Both of those segments exploded as viewers and advertisers invested in streaming during COVID-19 lockdowns. Roku stock gained a stunning 330% from its boom in 2020.
NASDAQ: ROKU
Key Data Points
Those good times came to a halt as people ventured outdoors again when the pandemic waned and also because of several economic factors. The supply chain negatively affected the player segment, and more recently, advertisers have been curtailing spending in light of inflation.
The near-term outlook is so bleak that management is guiding for just a 3% revenue increase in the third quarter to $700 million, an 11% drop in gross profit, and a huge drop in adjusted EBITDA, from $130.1 million last year to a $75 million loss this year.
Things are not as bad as they seem
Despite these problems, there are some positive signs. For example, take a look at this chart. While revenue growth has slowed down, it is still increasing significantly -- up 18% in the second quarter of 2022.
ROKU Revenue (Quarterly) data by YCharts.
Perhaps more importantly, Roku is capturing market share, a strong indication of how viewers regard it in the tight streaming market. Active accounts increased 14% over last year to 63.1 million in the second quarter, and this number has increased sequentially for many quarters. Streaming hours increased 19% over last year, and average revenue per user increased 21%.
Keeping the bigger picture in mind
As consumers slow their spending and the major streaming companies introduce their own lower-priced ad-supported tiers, Roku, whose streaming channel is free, is well-positioned to continue capturing market share and viewing hours. That might not result in higher revenue right now, but it sets Roku up at least for staying power. Roku has carved out a stable niche in a tough market category.
Management noted that there's a gap between viewership and ad spending; viewers aged 18 to 49 spend more than half of their viewing hours streaming, while advertisers have allotted only 22% of their 2022 U.S. advertising budgets to streaming sites. As more people open accounts and viewership rises, Roku's platform should look even more attractive to these advertisers.
The stock is still risky
At the current price, Roku stock trades at 2.4 times trailing-12-month sales, which is fairly cheap. The stock price has continued to slide and is down 17% in just the past month.
Despite some of these positive signs and long-term viability, it will take time for Roku to get back to strong growth and even longer to become profitable. On that front, however, it has demonstrated that it can be profitable at scale, posting several quarters of "surprise" profits when growth exceeded estimations.
Can the stock drop further? Yes, but at this cheap valuation, the price might present an entry point for risk-tolerant investors. Roku reports third-quarter earnings next week. If they come in better than predicted, expect the stock to jump.
