Roku (ROKU 0.15%) is a business that should do well as streaming services rise in popularity. Roku TVs and streaming sticks let users access a variety of content, as the company's platform can be a convenient hub for consumers with subscriptions to multiple streaming services. Plus it has free content of its own.
However, the company has been struggling to generate the same level of growth it achieved last year. And with a poor outlook for the economy, the growth stock has crashed 74% this year (by comparison, the S&P 500 is down just 17%). The danger is that things could get even worse for Roku in the months ahead.
Roku's growth rate has been on a steep decline
This year has been a tough one for businesses, as rising costs have been making it difficult for companies to pursue growth opportunities. One place where that has been evident is in ad spending, where Roku is vulnerable. Here's how sharply its revenue has cratered this year:
ROKU Revenue (Quarterly YoY Growth) data by YCharts
Revenue totaling $761.4 million for the quarter ending Sept. 30 was up 12% year over year, but it was less than the $764.4 million that Roku had reported a period earlier.
The company isn't expecting a quick turnaround
For the fourth quarter, Roku is projecting its top line to come in at $800 million, which would be an 8% decline from the $865.3 million that it reported in the prior-year quarter. Part of the reason the company isn't expecting a bounce back is that there is significant softness in the ad scatter market, where companies buy ads with little notice.
Image source: Company's Q3 shareholder letter.
On the company's recent earnings call, CEO Anthony Wood said, "Companies are pulling back their ad budgets because they're uncertain if there will be a recession or not. And so a lot of Q4 ad campaigns are being canceled."
Until there's clarity about what the future holds for the economy, Roku's financials may continue to suffer. And that doesn't bode well for a company that is coming off a third straight quarter for which it reported an operating loss.
Why I'd wait to buy the stock
I'm bullish on Roku's long-term future and am a fan of its products, but this streaming stock is just a bit too risky right now since it's hard to tell when a recovery might happen in the ad market. In the meantime, Roku has been incurring rising operating losses, and its operating cash flow over the past nine months has declined by $250 million to nearly $0.
In the long run, the stock should recover as ad spending returns, and it'll likely prove to be a good buy at its current price. But given that the worst may not be over for Roku, investors may also want to consider waiting on the sidelines for now.
