Economic headwinds continued to put pressure on Roku (ROKU 0.15%) in the third quarter. Revenue growth slowed to 12%, and the company reported a loss of $122 million, down from a profit of $69 million last year. Those dismal results can be traced back to high inflation. Consumers contending with high inflation are spending less, and brands have compensated by reducing their ad budgets.
Worse yet, management provided disappointing guidance, forecasting an 8% decline in fourth-quarter revenue. That shocked Wall Street. The holiday season is typically a period of robust growth for ad-based businesses, but Roku says brands are still reducing ad spend due to economic uncertainty.
That news sent Roku's share price plunging 19% after hours yesterday. But that knee-jerk reaction creates a buying opportunity for patient investors. Here's why.
1. Roku is a valuable partner to content publishers and advertisers
Roku is a pioneer in streaming technology. In 2008, it introduced the first streaming player and an operating system tailor-made for televisions, Roku OS. The landscape is far more competitive today, but Roku OS is still the only operating system purpose-built for televisions. Rival platforms like Amazon Fire TV and Apple TV run modified mobile operating systems, which typically create a worse experience for viewers.
Roku has parlayed its first-mover status and its reputation for reliable hardware (i.e., streaming players, smart TVs) into a strong market position. In the second quarter, Roku hardware accounted for 23.1% of all global streaming devices, and its platform powered 30.5% of global streaming time. Roku leads both categories by a wide margin. Second place Amazon Fire TV holds a 12.1% market share in streaming devices and 16% market share in streaming time, according to Conviva.
In short, the Roku brand carries weight with consumers, and the company engages viewers more effectively than any rival. That makes Roku a valuable partner to content publishers and advertisers, which positions the company as a frontrunner in the quickly growing connected TV (CTV) advertising market.
According to eMarketer, CTV ad spend in the U.S. alone will increase by 20% annually to reach $39 billion by 2026, and analysts at BMO Capital Markets say that figure could hit $100 billion by 2030. But Roku CEO Anthony Wood believes all TV ads will be streamed, and the company is slowly expanding into new geographies. It brought its ad business to Mexico this year, and it launched its first Roku TV in Germany. That builds on momentum from last year, when Roku brought its ad business to Canada and launched new Roku TV models in the U.K. and several Latin American countries.
With that in mind, IMARC Group says television ad spend will total $344 billion by 2026. As more marketers move ad budgets to CTV and Roku continues to expand its business, the company's market opportunity should continue to grow for many years.
2. The Roku Channel is growing quickly
Roku connects viewers with ad-supported video on demand (AVOD) and subscription video on demand (SVOD) services. It monetizes SVOD content by processing payments with Roku Pay and taking a cut -- 20% -- of each transaction. But it monetizes AVOD content in two ways: Roku takes a portion of ad inventory from AVOD publishers, typically 30%, and it sells that inventory to marketers. Roku also provides ad tech tools through its OneView platform, which helps marketers run targeted campaigns across CTV, desktop, and mobile devices.
However, Roku is investing aggressively in The Roku Channel, an AVOD service featuring free movies, TV shows, and live channels for news. Roku owns 100% of that ad inventory, which makes The Roku Channel an important source of potential revenue.
For years, Roku filled The Roku Channel with content licensed from other publishers, but the company started adding original content to the mix last year, and the early results are promising. The Roku Channel has ranked among the five most-viewed channels on the platform in the U.S. for three consecutive quarters. Better yet, while Roku saw total streaming hours increase 21% in the third quarter, streaming time on The Roku Channel soared 90%.
3. Roku is expanding through product innovation
In the second quarter, Roku partnered with Walmart to introduce Shoppable Ads. That service allows viewers to buy products directly from ads, and it leans on Roku Pay to reduce friction by prepopulating shipping and payment information. Roku expanded Shoppable Ads to thousands of additional brands in the third quarter.
Switching gears, Roku recently launched a line of smart home products, including cameras and video doorbells that integrate with Roku OS, meaning consumers can view live video and receive notifications directly on their televisions. Consumers can also control smart home devices using the recently launched Roku Smart Home mobile app.
For all of those reasons, this growth stock is worth buying on the dip.
