Roku (ROKU -10.47%) investors had a forgettable 2022. Their stock shed 80% of its value through mid-December as Wall Street started worrying about slowing growth and ballooning net losses. That decline was far worse than the 18% drop in the S&P 500 and even the 52% decline for industry peer Netflix (NFLX -1.05%).

That brutal 2022 performance implies that Wall Street sees nothing but challenges ahead for the streaming video company as it seeks to break back into profitability and reaccelerate growth. With that backdrop in mind, let's take a look at whether or not that bearish outlook is warranted.

The hard part is on the way

The best single explanation for Roku's stock price slump in 2022 is that the worst is not yet over for its current operating slump. Management said back in early November that sales would likely fall for its core platform business in the fourth quarter.

Advertisers are pulling back on their spending sharply, so the prior quarter's 12% sales increase might represent the last positive result on this metric for some time. Most Wall Street pros are predicting sales will drop by 6% in Q4 and then by about 3% in Q1 of 2023.

Roku executives contributed to that sour outlook when they said in a letter to shareholders that, "It is difficult to predict when [the poor TV ad sales trends] will stabilize or rebound."

Weak profits

The short-term outlook isn't much better on profits. Roku reported ballooning losses in the third quarter thanks to the combination of slowing growth and surging expenses. That situation is likely to get worse before it gets better, though. It will take several quarters for Roku's costs to catch up to its weaker growth profile, after all.

Wall Street is bracing for significant losses for Roku in fiscal 2022 and in the new year ahead, consistent with the worsening profit trend we've seen over the last several quarters.

ROKU Operating Margin (TTM) Chart

ROKU Operating Margin (TTM) data by YCharts

The good news is that Roku isn't losing its prime market-share position. In fact, its Q3 engagement hit a record 21.9 billion hours, up 1.1 billion hours from the prior quarter. Roku gained 2.3 million new users in the period, too. These gains suggest the business will bounce back once the cyclical downturn ends in the advertising niche.

Looking ahead

On the other hand, the last few earnings reports have demonstrated that Roku's business is too reliant on the TV ad industry today. That extreme focus helps explain why management is pushing into new niches like smart-home subscription plans and original content. Progress here will make the business less susceptible to the type of earnings volatility that shareholders are seeing right now.

The company's tight connection to the digital advertising market sets some limits on what Roku's shares can do in 2023. The stock might not surge over the next year, even assuming that the U.S. economy avoids a recession. That rebound will likely require some concrete signs that Roku is done reporting losses and that the business can operate profitably without a booming ad market. Alternatively, a market-wide return to richer advertising sales would be great news for Roku and its investors, but the company has no direct control over the ad market's overall health.

Unless investors see clear progress on this score by late 2023, Roku shares might continue underperforming the wider market and its more profitable peers like Netflix.