2022 could hardly have been worse for Roku (ROKU -1.25%) stock investors. The streaming video platform shed over 80% of its value compared to a roughly 20% drop in the S&P 500. Shares are down over 90% from their all-time high in mid-2021.
Declines of that magnitude usually mean that a business has lost significant earnings power and isn't just going through a temporary growth slowdown. With that major risk in mind, let's take a closer look at whether the stock is worth adding to your portfolio right now.
The bad news
Let's start with the bad news, which isn't trivial around Roku's business. Revenue growth from its core streaming platform has slowed to just 12% in the most recent quarter, and management is projecting declines in the final quarter of 2022.
The main culprit here is collapsing advertising spending for digital TV ads. The industry shrank by 17% in the second quarter and by 38% in Q3 thanks to shrinking marketing spending around what could be a recession developing in 2023. Roku said in a letter to shareholders in early November that it expects these declines to continue "until at least next year."
Because of Roku's reliance on the ad market, this turn of events has had a brutal impact on earnings. Net income was $219 million in the first nine months of 2021, but the company lost $261 million in the same period of 2022. The pace of losses is likely to worsen, too, before results start improving.
The good news
The good news is that Roku's platform is still growing, having added 2.3 million new accounts this past quarter. Engagement is strong, too, with streaming hours rising by 1.1 billion to 21.9 billion. Success here gives Roku a great foundation it can rely on as it adds value to its service for users and for advertisers.
And that value is what will likely determine the company's big-picture earnings potential regardless of temporary slumps like recessions. "Economic cycles do not change our significant, long-term opportunity in TV streaming," management said.
The executive team is also busy diversifying Roku's business so that it isn't so sensitive to shifts in the ad market in future years. There are many good options ahead on this score, including Roku's own content subscriptions and hardware sales.
Wait and see
But it makes sense for investors to watch this stock for at least another quarter or so to see whether Roku can show a clear path back toward profitability. The current business model isn't achieving that goal, and that's a good reason for the stock's decline in 2022.
ROKU Operating Margin (TTM) data by YCharts
The shares might seem cheap at a fraction of the price investors paid for the stock back in late 2022. But there are other, more attractive options in the streaming video space, like Netflix. The streaming video leader is projecting accelerating user growth into 2023 and remains highly profitable.
Roku's stock doesn't look like a clear buy right now, at least until the business gets on a similarly positive growth path.
