Roku (ROKU -0.40%) shares are down substantially from July 2021's all-time high, bumping into new multiyear lows just last month. A slowdown of the connected television (CTV) ad business paired with more competing devices is taking a toll, with no apparent end in sight.
And yet, Wall Street remains relatively unfazed. While the analyst community lowered its consensus price target in step with the stock's sizable slide, the average price target of $59.32 per share is still 17% above Roku's present price. These professionals also rate the stock a bit better than a hold despite recent red flags.
I get it. Roku has been one of the key drivers of the entire streaming movement, and its televisions and receivers remain North America's most-purchased brand.
The streaming industry's future isn't likely to look a whole lot like its past, though. More to the point, that future is apt to feature Roku far less than it's been featured in the past or is being featured now. Would-be buyers may want to think twice before stepping into this stock that Wall Street still says is undervalued. Three key concerns stand out above the rest.
1. Roku "owns" the part of CTV that advertisers care less and less about
Anyone reading this already understands Roku's business is twofold. While its initial source of revenue was the sale of streaming receivers -- or the "boxes" connected to television sets -- "platform" revenue driven by advertising, revenue sharing, and licensing has since become the company's main breadwinner.
See, Roku charges video content makers to be featured or promoted on device owners' user interface screens. Of last quarter's $761.4 million top line, $670.4 million of it came from media outfits advertising their goods via Roku's televisions and streaming receivers. The company also manages its own ad-supported channels, although these are very modest draws compared to services like Netflix or Amazon's Prime.
Data source: Roku. Chart by author. All figures are in millions.
And that's a problem.
When Roku first ventured into the digital advertising arena in a big way back in 2016, streaming was still a fairly uncrowded space, and ad-supported streaming services were little more than an experimental side project. At that time, advertisers didn't exactly know where their CTV ads should be seen.
Much has changed in the meantime. The biggest of these changes is that showing advertisements in the middle of a streaming broadcast is now mainstream. Both the aforementioned Netflix and Walt Disney's Disney+ are now offered in ad-supported versions, putting these content providers in greater control of how often and to whom CTV ads are shown.
That's not to suggest Roku has no hand to play here. It just no longer has the strongest, most coveted hand when it comes to the fight for advertisers' video spending plans. As the chart above illustrates, platform revenue is still growing, but that growth is clearly slowing.
2. Roku's competition is slowly but surely creeping in
Roku is still outselling all other competing streaming technology providers. But, its market share is fading.
Market research outfit Omdia offers some telling numbers, suggesting Roku's share of North America's streaming device market slipped from 35% in 2021 to only 33.4% this year. That contraction jibes with data from Parks Associates pointing out how Roku's reach within the United States has fallen from a peak of 39% of actively used streaming devices in 2019 to only 36% as of last year.
In and of itself, this slight dip isn't devastating. Roku sells its wares outside of the U.S. as well, and besides, the past couple of years have been unusual ones for the streaming business.
The thing is, the United States is still the company's most important market. Atlantic Equities analyst Hamilton Faber says domestic users make up 80% of the company's active user base of 65.4 million accounts. That's a challenge simply because there's not much growth left to tap here. Faber noted early this year, "We estimate annual U.S. adds will ease from a pre-pandemic figure of around [8 million] in 2019 to an average of [2.3 million] over the next four years."
And Roku's active account growth since then suggests Faber's so-so outlook is on target. Meanwhile, average per-user revenue has been flattening since the latter part of last year.
Data source: Roku. Chart by author. Active account figure is in millions.
And Atlantic Equities' Faber isn't the only doubter. A similar outlook from Insider Intelligence's eMarketer suggests Roku's penetration of domestic CTV users will almost completely stall at 53.6% in 2023, up a mere 20 basis points from this year's projected 53.1%.
3. The connected TV device market's growth itself is slowing
Were the total connected television market still set to grow, Roku's lackluster market share might not be a major concern.
That's not the likely shape of things to come, however.
Technology market research outfit Technavio estimates the worldwide connected TV market will only grow at an annualized clip of 7.6% through 2026. Moreover, most of that modest growth is expected to materialize in North America, where Roku is struggling the most to add market share.
Technavio further estimates the worldwide smart TV market will expand by 10.8% per year through 2027, seemingly helping Roku's cause. But Technavio names other television brands, like Samsung, Sony, and LG Electronics, as the pace-setters of that sliver of the smart device market. Their brands are already among the top players within the worldwide smart television market, whereas Roku isn't. It could be tough to outsell those brands, particularly in the Asia-Pacific region, where Technavio believes most of the smart TV market's future growth will come from.
Just not good enough
None of this is to suggest Roku is doomed. It will survive. It is to point out, however, that things aren't going to get any easier from here. They're only going to get tougher. Roku's future isn't as bright as its past has been, and its past has only seen intermittent profitability. That's a problem for a stock that's been buoyed more by hype and hope since its 2017 IPO.
My advice? Look elsewhere. There are plenty of other, better risk-versus-reward propositions to own.
