3 Things Investors Should Know Before Buying Roku Stock

From its initial public offering in Sept. 2017 until hitting an all-time high in July 2021, Roku (ROKU 1.58%) shares produced a monumental return of more than 3,000%, absolutely crushing the Nasdaq Composite during the same period. In the past year, however, it has been a different story as the stock is down a whopping 90% from that peak (as of this writing).

A general risk-off sentiment from investors, spurred by rising interest rates, is partly to blame. Investors just aren't as enamored anymore by high-flying growth stocks. But Roku is also dealing with a dramatic slowdown in its business as the economy softens.

For investors who are considering buying the stock now, here are three things smart investors know about Roku. 

1. Roku is agnostic in the streaming wars 

Roku is a streaming platform, operating a three-sided ecosystem that connects viewers, advertisers, and content companies. The content companies, like Netflix and Walt Disney, want to reach a broad audience, so they want their services available on the Roku platform. And businesses both big and small want to market to these viewers in a targeted, efficient way. That's why Roku has done well historically. 

But unlike those content companies, which have to shell out tens of billions of dollars every year on fresh content to keep viewers engaged, Roku doesn't need a monster budget. While Roku does produce some original content with its free Roku Channel, the business can benefit by aggregating other companies' content offerings. As Netflix and Disney attract more subscribers, Roku gains with the potential to add more active accounts. 

All in all, Roku benefits from the overall growth of the streaming industry, regardless of which service provider has the most subscribers. According to data from Statista, the number of cable-TV households in the U.S. will fall to 57.2 million in 2026, from about 70 million today. This trend should support a rising tide for Roku's business in the future. 

2. Roku is growing key metrics 

Despite the bleak macroeconomic picture, Roku continues to grow its most important numbers. In the third quarter, active accounts, now at 65.4 million, were up 16% year over year. What's more, viewers streamed an incredible 21.9 billion hours of content on Roku's platform during the quarter, up 21%. As the U.S. enters the colder months, forcing people inside, this number could march higher. 

Roku's value proposition for consumers is obvious. There is a seemingly never-ending list of streaming services out there vying for viewers' time and attention. Having a central hub to access all of these services is valuable. It's also a necessary tool as advertising dollars continue to shift from traditional cable TV to connected TV. 

The final key metric investors should follow is average revenue per user, or ARPU. At $44.25 in the third quarter, this figure increased 10% versus the prior-year period. This marked a sharp slowdown from the more than 20% gains of the previous two quarters. To blame is the softer ad market (more on that later), which is resulting in companies pulling back on marketing spending as the economy enters a potential recession. 

3. Roku is facing macroeconomic headwinds 

During the third quarter, Roku posted revenue of $761.4 million (up 12%) and an operating loss of $147.0 million. Both figures point to a business that's not growing as quickly as shareholders are used to. The uncertain economic environment is to blame for the company's slowdown. More specifically, ongoing inflationary pressures are hampering Roku's Player segment, which includes sales of media sticks and other hardware. Leadership has decided not to pass on higher input costs to customers, resulting in a negative hardware gross margin of 19.2% in the third quarter, the sixth straight quarter of negative gross margins in this segment.

And if we look to the advertising market, it isn't anything to write home about. Other major digital ad businesses have reported a dramatic slowdown, a trend that has trickled over to Roku. "As we enter the holiday season, we expect the macro environment to further pressure consumer discretionary spend and degrade advertising budgets," CEO Anthony Wood and CFO Steve Louden wrote in the latest shareholder letter. 

As a result, for the current quarter, management expects revenue to come in at $800 million, equating to a 7.5% year-over-year decline. Ultimately, the company should resume growth once the economy rebounds, whenever that may be.