Just about everything that could have gone wrong for Roku (ROKU -2.67%) in 2022 has.

The stock has plunged 82% and just touched another 52-week low. Revenue growth is expected to be negative in the fourth quarter. And after delivering a solid profit a year ago, the company has now lost $261 million through the first three quarters of the year.

While those data points might seem to indicate a broken business, Roku is in a better position than it looks. After the brutal sell-off this year, it's worth asking if the stock is a good rebound candidate for 2023.

A person holding a remote in front of a TV.

Image source: Getty Images.

The good news

Roku's financial numbers may be moving in the wrong direction, but the underlying business still looks healthy even as it faces macro challenges. Usage numbers, for example, showed solid growth in the most recent quarter with active accounts up 16% year over year to 65.4 million, hours streamed up 21% to 21.9 billion, and average revenue per user increasing 10% to $44.25. 

Those numbers all grew sequentially as well, showing that Roku continues to attract new users to its platform and increase time spent using its devices. This should drive long-term growth regardless of the current headwinds in the ad market.

Most of Roku's business comes from advertising, and digital advertising is a highly cyclical business because companies can easily scale their spending up or down according to demand or their budget. Roku noted in its third-quarter shareholder letter that there was particular weakness in the traditional TV ad scatter market, which was down 38%. The scatter market refers to ad inventory that is not purchased early in the viewing season.

Management expects continuing weakness in the ad market into next year. But Roku is far from the only digital ad platform facing these challenges as both Alphabet and Meta Platforms posted a sharp deceleration in revenue in their third quarters as did other social media companies.

However, as Netflix co-CEO Reed Hastings has argued, advertisers are hungry to connect with an audience that has gravitated from linear TV to streaming. Connected TV is a uniquely powerful form of advertising because it's the only channel that offers targeted video ads. Connected TV is expected to grow significantly over the next decade, and Roku should be a beneficiary of that trend.

The valuation question

It may be hard to call Roku stock cheap right now, considering how much money it's losing, but the stock is trading at a considerable discount. Not only is it down more than 80% year to date, but the stock price is as low as it's been in four years. 

On a price-to-sales basis, the stock currently trades at multiple of less than 2, and if you assume the company can get back to the level of profit it had last year, at $1.71 in earnings per share, its price-to-earnings ratio would be 24.

Historically, Roku has been valued as a growth stock, but with revenue grinding to a halt, investors now seem to be questioning its long-term growth potential.

Will it bounce back in 2023?

How Roku performs in 2023 will depend largely on the macro environment. If the Federal Reserve continues to hike interest rates and the economy slides into a recession, it could indicate more trouble for the ad market and the streaming stock could fall even further. However, if we get a "soft landing" and avoid a deep recession, Roku stock could soar on the rebound, especially if ad demand comes back.

For long-term investors, though, next year's performance isn't the most important thing to focus on now. Connected TV continues to gain traction, and Roku is growing its audience and improving its product with features like shoppable ads, which allow viewers to buy advertised products on Walmart simply by pressing the OK button on their remote. 

In other words, when advertiser demand swings back, Roku should be able to take advantage of it. As CEO Anthony Wood said in the latest shareholder letter, "The broad, secular shift to streaming remains fully intact, and it is for this reason that we continue to invest and innovate."

While Roku stock is likely to be volatile in 2023, the sell-off looks like a good buying opportunity as the stock should bounce back when the macroeconomic environment improves.