Some stock crashes hurt worse than others. Roku (ROKU -0.40%) has been one of this year's worst-performing investments. The stock has plummeted 82.8% in 2022, and we still have three more trading days to go before we wrap up this brutal year.
Despite the horrendous stock chart, it wasn't all bad for the streaming video pioneer. It may seem hard to focus on the positive in a year when profits turned to losses, growth prospects have deteriorated, and analysts have perpetually been slashing their price targets on the stock. The recent and understandable wave of tax-loss selling this month is the sour cherry on top of this melting ice cream sundae.
Grab a spoon. Let's dive in, checking out three things that went right for Roku in this otherwise lamentable year.
Image source: Getty Images.
1. Viewers keep coming
A bearish thesis coming out of 2021 was that we would be streaming less in 2022. We went from taking baby steps out of the pandemic as COVID-19-tackling vaccines hit the market last year to taking larger steps -- outside -- this year. Revenge travel, the return of once-postponed live events, and long overdue reunions would keep us away from our smart TVs.
Roku found a way to grow anyway. The 65.4 million active accounts it was serving by the end of September is 16% more than than a year earlier. A whopping 21.9 billion hours were streamed in those homes, a 21% increase over the past year. These two metrics show growth, but don't overlook the nuance here. Usage outpacing account growth means that the average home is streaming more and not less than it was a year earlier. Viewers keep coming, and engagement is also on the rise.
2. Things got "Weird"
The initial appeal to the Roku platform -- the reason why it's nearly twice as popular in the U.S. as its closest rival -- is its agnosticism. It plays nice with thousands of available apps, unlike the tech giants that are prioritizing their homegrown services through their connected TV devices. This doesn't mean that Roku doesn't get tangled in ad-sharing and licensing disputes with streaming services on its platform. It's in the middle of one now. However, Roku has spent the past couple of years fleshing out proprietary content for its own free operating system.
It has turned its namesake Roku Channel into one of the five most popular apps for its viewers. Streaming for Roku Channel has soared 90% over the past year, and unlike the ad revenue-sharing deals it strikes with third-party apps, there's no need to share the wealth here.
Roku made a big bet on a passion project, paying up for Weird: The Al Yankovic Story. The film -- a parody biopic of the accordion-wielding master of song parodies starring Daniel Radcliffe as Yankovic -- was a cost-controlled feature with a mere $12 million production budget. It turned heads, and a November release date was brilliant, weeks before the holiday shopping season to cement Roku as the dongle or smart TV operating system of choice for gift buyers.
3. The valuation is tempting
It's fair to say that Roku's fundamentals have taken a hit in 2022. It's not just that last year's profits have been wiped clean with losses in the first three quarters of 2022. Analysts don't see a return to profitability until 2026. It's not just the recent string of five consecutive quarters of decelerating revenue growth. The current period that ends this week is going to be a disaster based on Roku's latest guidance.
This isn't a turnkey stock. It's a fixer-upper. However, the valuation -- on a revenue basis -- has never been this low. With the stock closing below $40 on Tuesday for the first time in 47 months, it's trading at an enterprise value that is just 1.4 times its trailing revenue.
One can argue that the opportunistic valuation isn't something that Roku itself got right. It's the streaming video stock bellwether's missteps and misfortunes that got us here. However, let's reflect back on when we were last below $40. It was January 2019. Revenue has more than quadrupled, and even gross margin has improved as Roku's high-margin platform wasn't the key contributor that it is today. Roku has put its shareholders through a lot in 2022, but a growing platform for a rising star in original content at a historic valuation can't be ignored for long in 2023.
