Among the entire class of previously high-flying pandemic stocks, Roku (ROKU -10.29%) ranks among 2022's biggest losers. The streaming company's share price has fallen roughly 77% year to date, and its share price is down a staggering 87% from the lifetime valuation peak reached in July 2021.
Should investors treat the big valuation pullback as a buying opportunity, or have macroeconomic and industry-specific conditions shifted in ways that make the company's stock too risky? Read on to see why two Motley Fool contributors come down on opposite sides of the bull-versus-bear debate with Roku stock.
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The bear case for Roku
Parkev Tatevosian: Roku has done an excellent job capitalizing on the secular tailwind of increasing consumer adoption of streaming content. The company sells streaming players that connect TVs to its platform, where users can access their streaming services. Roku makes money, not so much by selling those players, but rather on user activity once they are on the Roku platform.
For that reason, Roku has been willing to sell its players without a profit to get folks to use its platform. That said, both segments of Roku's business plan face headwinds in the near term. That player segment, which reports sales of the units connected to TVs, has reported a gross loss for five consecutive quarters.
To make matters worse, those losses are increasing. Management expects these losses to continue as it has chosen to absorb higher costs rather than raise prices on its products.
Thankfully, its platform segment has delivered gross profit margins above 50% in the last five quarters. Roku gets a percentage of the revenue that folks spend while using the Roku app, and it earns revenue for showing advertisements when people are watching content through the platform.
However, both sources of revenue have slowed. Consumers are spending more time away from home and spending less money on content.
Finally, advertisers have reduced spending as fears of a recession are mounting. That has caused the gross profit margin in the platform segment to fall from 65% in Q3 2021 to 55.8% in Q3 2022.
Roku will undoubtedly benefit from the long-lasting tailwind of people switching to streaming content, but its near-term prospects could remain challenged for several quarters more.
The bull case for Roku
Keith Noonan: While Roku has generally seen growth decelerate across key metrics, it's posting solid expansion despite challenging bases of comparison and headwinds on multiple fronts. The company managed to grow its total active user base roughly 16% year over year in the third quarter, and total streaming hours conducted through the company's streaming-technology platform increased 21.7% year over year to reach 21.9 billion hours.
Unlike the company's valuation, engagement across Roku's streaming tech platform has not fallen off a cliff. Rates of growth have just slowed substantially compared to periods when pandemic-driven conditions were driving massive adoption momentum and pushing engagement to unprecedented levels.
While the company has actually lowered costs for its customers on some fronts, average revenue per user over the trailing-12-month period was still up approximately 10% year over year in Q3, and overall revenue increased roughly 12% to reach $761 million. Roku continues to grow both overall users and monetization per user on its platform, but the significant growth deceleration and tough macroeconomic backdrop have crushed the stock.
Facing high levels of inflation and rising interest rates, the market has been dumping unprofitable tech companies this year, and Roku carries the unfortunate distinction of having shifted back into the red on both operating-income and net-income bases.
On the other hand, the streaming player has continued to grow revenue at a double-digit clip, it posted a still-decent 46.9% overall gross margin last quarter, and the company is valued at just 2.4 times this year's expected revenue.
While Roku isn't currently profitable and faces a potentially difficult outlook in the near term, it also has a net cash position of roughly $2 billion and looks non-prohibitively valued, with a market capitalization of roughly $7.4 billion.
Should investors buy Roku stock?
Risk-averse investors who are worried about near-term volatility continuing to disrupt the market may want to avoid Roku stock. The company has swung back to posting operating losses this year, its sales growth has slowed substantially, and the company has a growth-dependent valuation in a market that could continue to be quite challenging for stocks in the category.
On the other hand, Roku has a leading position in its corner of the streaming-technology and digital-advertising markets, and its valuation has been pushed to levels that could open the door for long-term investors to bank substantial returns with the stock. The company's share price could continue to see volatile swings, but Roku has enough advantages to make the stock worthy of consideration for risk-tolerant investors seeking beaten-down plays in the streaming-video space.
