Just when you think that Roku (ROKU -3.83%) is ready for a primetime comeback it finds a way to stumble like a midseason cancelation. Shares of the leading streaming TV platform tumbled 9% last week and at one point was down as much as 18% after posting mixed financial results

With shares closing out the challenging week below $50, Roku has plummeted nearly 90% from the all-time highs it hit last summer. Roku isn't perfect, obviously, but could the recent sell-off be overdone? Let's take a closer look at Roku's downward spiral, as well as a reason to be hopeful that better days are ahead. 

A couple and their dog channel surfing on the couch.

Image source: Getty Images.

Thinking inside the box 

At least four analysts downgraded Roku stock last week, and several more slashed their price targets. The third quarter itself wasn't so bad, landing comfortably ahead of the guidance it laid out three months earlier. Net revenue rose 12% to $761.4 million, as a 15% year-over-year increase in its flagship platform revenue was held back by a 7% decline in dongles and other hardware form its margin-shredding player business. Roku's outlook was for a 3% increase to $700 million. 

Roku has had some hiccups lately on the way to the bottom line, but it fared better than it was expecting during its crystal ball reading in late July. Roku's gross profit of $356.8 million and adjusted EBITDA of negative -34.4 million for the three months ending in September were better than the $325 million and negative-$75 million it was initially targeting.

The popularity of the platform continues to expand. Roku closed out the quarter with a record 65.4 million active accounts, 16% more than it was serving a year ago. Average revenue per user rose 10% to $44.25 on a trailing 12-month basis. We're also engaged, as the 21.9 billion hours that Roku served during the quarter is a 21% year-over-year improvement. 

These are encouraging metrics, defying the bearish thesis that folks will be streaming less -- not more -- as we emerge out of the pandemic. Roku continues to ascend as the streaming entertainment hub of choice. This doesn't sound like a stock that should be down 90% form its all-time high, but then we get to Roku's problematic near-term outlook. 

Roku's eyeing roughly $800 million in net revenue for the quarter, sequential improvement but not enough to satisfy investors as the fourth quarter is typically spiked with player sales as holiday gifts. The guidance for the current quarter is nearly 8% below the $865.3 million it rang up a year earlier. Every cloud has a silver lining, and here bulls can point to how its conservative guidance for a 3% increase in the third quarter turned out to be a 12% year-over-year jump. The problem here is that this cloud is gray, stormy, and ready for a deluge. 

We're seeing marketers scale back on their ad spend as the economy starts to contract, and it's going to be a cutthroat holiday shopping season on the hardware front. It's not just about the 8% projected decline for the fourth quarter. Roku sees its gross profit slipping 14% to $325 million. Roku is also bracing investors for a third consecutive quarter of negative adjusted EBITDA, and the $135 million hole this time reverses $86.7 million in positive adjusted EBITDA during last year's holiday quarter.

Turning up the brightness

Let's cut through the bleakness, starting with the grimmest nugget in Roku's guidance. It's burning through a lot of money right now, but that comes as it builds out its product offerings and its platform's stickiness. This weekend's debut of Weird: The Al Yankovic Story is a big step for Roku in differentiating its platform. The film was made on a modest $12 million budget, but like Roku's earlier acquisition of Quibi's catalog, it seems to be a smart investment in exclusive content.

Roku is also rolling out new products, hoping that its presence as a trusted brand inside your TV can extend to home theater and smart home products. It's an ambitious diversion that lacks this high-margin payout of its smart TV's platform business, but it's a logical next step in the Roku timeline. It's also earning passport stamps as it enters partnerships to go international.

It can weather the liquidity crunch for now. It has more than $2 billion in cash on its balance sheet, nearly three times its total debt. Roku also is trading at an enterprise value that is a record low multiple of 1.8 times it trailing revenue. If the economy worsens it will be painful for streaming video stocks, but it's also worth noting that we'll spend a lot more of our budget-conscious evenings on a free ad-supported hub -- like Roku. It will weather the storm better than most ad-based businesses. It will thrive again as we claw our way out of the economic setback. The stock is cheap here, and a Hollywood ending is more than possible here.