The coronavirus pandemic was undoubtedly a boon for streaming stocks. Stuck-at-home consumers needed ways to entertain themselves, and what better way to satisfy that need than to turn the TV on and watch their favorite shows and movies?
Along the same vein, Roku (ROKU 0.15%) shares skyrocketed 148% in 2020. But after peaking in July 2021, it's been a completely different story as the stock is down a whopping 88% from its all-time high.
Should investors buy Roku stock right now amid the market's weakness? Here's why it might be a good time to press play.
Value proposition
Roku has two operating lines. One is the Platform segment, which includes high-margin advertising and subscription-sharing fees. The other is the Player segment, where sales of media sticks reside. The Platform segment represented 88% of company revenue in Q3, with the remaining balance going to the Player segment. This wasn't always the case, however, as Roku generated 53.9% of sales from hardware five years ago.
The company's media dongles let consumers view all of their streaming content in one place, especially valuable now that the number of choices is unlimited. And on Roku's platform, both small and large businesses can utilize a product called OneView to manage their advertising spend to target Roku's viewers.
Roku provides significant value for its viewers, third-party content companies, and advertisers. And the larger that Roku gets, the more impenetrable its competitive positioning is. Having more active accounts, now at 65.4 million, attracts streaming services that want to boost their subscriber count. And more accounts mean more hours spent streaming on Roku's platform, at 21.9 billion last quarter, which translates to an expanding treasure trove of data that is incredibly valuable to companies looking to allocate ad spend. It's a powerful flywheel that is hard to stop.
And if we zoom out, we'll see that Roku is riding a broad secular trend that should benefit it for years to come. According to data from Nielsen, streaming overtook traditional cable TV in terms of viewing time in the U.S. in the month of July, as people are increasingly starting to realize how affordable and better of a consumer experience streaming is.
With a clear value proposition for users, coupled with the strong underlying trend for households to ditch their old cable subscriptions, Roku is in an advantageous competitive position.
Macroeconomic problems
Nonetheless, the business can't avoid the current state of the economy. In each of the past six quarters, the Player segment has posted a negative gross margin, meaning Roku is actually losing money on each device it sells. Inflation across the economy has pushed up input and commodity costs, but management has decided not to make customers pay higher prices. As long as active accounts keep growing, as they have been, then Roku is in good shape because it is able to monetize these accounts with its platform.
Additionally, the digital advertising market is slowing down dramatically, which shouldn't be surprising given that many financial experts think a recession is on the horizon. In uncertain economic times, spending on marketing can often be the first line item that's cut. Management teams don't see the need to spend on marketing when consumers and the economy are struggling.
The leadership team is forecasting Q4 revenue of $800 million, equating to a year-over-year decline of 7.5%. For what many consider to be a growth stock, that's not a positive outlook.
But despite ongoing macro headwinds and decelerating growth, investors might want to consider buying Roku shares right now, which trade at a price-to-sales ratio of just 2.5, nearly the cheapest they've ever been. Every other company is dealing with inflation and a weaker economy, and this should give investors confidence that Roku's long-term potential hasn't really changed.
Plus, the business currently has $2 billion of cash and cash equivalents on its balance sheet, compared to total liabilities of $1.6 billion. This strong balance sheet and financial position should ease investor concerns, as Roku is more than prepared to handle a possible major economic slowdown in the quarters ahead.
The long-term outlook hasn't changed, but the stock price has. Smart investors should pounce at the opportunity to scoop up Roku shares on the cheap right now.
