Not much has gone right for Roku (ROKU -1.04%) this year. After the stock price surged during the pandemic, shares have collapsed this year, down 77% year to date and nearly 90% from their peak last year. Revenue growth abruptly stalled out, coming in at 18% in the second quarter and with guidance calling for just 3% growth in the third quarter.
With its digital advertising peers, like Alphabet and Meta Platforms, reporting weak earnings, Roku is likely to face substantial headwinds for at least the second half of the year, if not well into 2023 or as long as advertisers fear a recession. However, there's at least one reason to believe in the stock's long-term opportunity.
Take it from Reed
Netflix (NFLX -3.98%) Co-CEO Reed Hastings has long been a visionary and doesn't hesitate to share his insights on the industry. In 2015, Hastings predicted that linear TV would decline every year for the next 20 years while streaming TV grew, a prediction that has since been borne out.
On Netflix's recent earnings call, Hastings offered further thoughts about the state of play in television, saying:
What I underappreciated was just the impact on advertisers. They're just being able to reach fewer people. And then the 18 to 49 demographic is even faster than the decline in pay TV. So, this is what is really fueling the cycle is that really collapsed linear TV as an advertising vehicle outside of a few properties like sports.
Hastings also noted that former Disney CEO Bob Iger made a similar comment at a conference in September, saying linear TV is falling off a cliff. With Netflix set to launch its advertising tier in early November, Hastings was discussing the implications for his own company, but the impact for Roku is also clear.
Advertisers are shifting to connected TV because that's increasingly where the viewers are, especially the valued 18-49 demographic. As Netflix and Disney+ prepare to launch their advertising tiers, the overarching trend should be a long-term tailwind -- now with more than 63 million active accounts -- and generally claims 30% of advertising inventory from ad-based streaming partners.
As Netflix and Disney launch streaming and the shift from linear TV to streaming TV accelerates, Roku could be a huge winner. As a distributor, it doesn't matter to Roku who emerges victorious in the streaming competition. The company benefits as more media companies shift their attention to streaming.
What's next for Roku
The connected-TV ad market is expected to continue growing robustly. After video-based ad spend jumped 57% last year to $15.2 billion in the U.S., it's forecast to reach $27.5 billion by 2025. However, that's only a fraction of the linear TV ad market, which is in the $70 billion range. Connected TV also has the potential to build on the linear TV market because it adds value through targeting and the ability to watch on multiple screens.
Wall Street has a low bar for Roku's stock when it reports earnings on Nov. 2, calling for 3% revenue growth to $702.3 million and an adjusted loss of $1.27 per share compared to a $0.48 per-share profit in the year-ago quarter. However, regardless of what happens this quarter or next, Roku is well positioned to capitalize on the massive opportunity in connected TV. The short-term headwinds are a distraction for the streaming stock and its investors.
