For a time, it seemed Roku (ROKU -9.94%) was invincible. At the height of the pandemic, its revenue had soared 548% since its late-2017 IPO, driving its stock up 1,940%. But Roku's lockdown-driven growth spurt gave way to tough comps, slowing account growth, and the biggest stock market crash in more than a decade. As a result, the stock has plunged 90% from its peak.
Yet, despite all the bad news priced into the stock, there are reasons to believe the best is yet to come for the streaming video pioneer. Here are three predictions about what to expect from Roku in 2023.
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Roku account growth bounces back
Like many companies in the streaming video business, Roku spent 2022 with a pandemic-related headache. Viewers on lockdown in 2020 and 2021 accelerated the adoption of streaming, particularly during the early days of COVID. But reversion to the mean is unforgiving, and that massive pull-forward of business eventually gave way to nearly impossible-to-surmount year-over-year comps.
That's not all. COVID-19 outbreaks in China sent the supply of Roku-enabled devices and connected TVs into free fall, causing the company's account growth to slow to a crawl.
Yet, there's a powerful secular tailwind that will fuel Roku's future growth over the coming year. Viewers are abandoning cable TV in record numbers. During the first three quarters of 2022 (the most recent data available), the major pay-TV providers shed 4.6 million cable subscribers, according to information provided by Leichtman Research Group.
The trend is expected to continue, with the total defections for the year expected to exceed the record-setting industry losses that occurred in 2020. Logic dictates that many of these cord-cutting viewers will turn to streaming video to meet their home entertainment needs, and Roku will be there to fill the void.
Ad revenue rebounds
Some investors think of Roku in terms of its popular streaming devices, but that's not how the company makes most of its money. It licenses use of the Roku operating system (OS), which powers a growing number of connected TVs. The company also gets a 30% split of the digital advertising on its platform, as well as 100% of the advertising that appears on The Roku Channel, its home-grown streaming offering. These profit drivers make up Roku's platform segment, which generates the lion's share of its revenue.
Unfortunately, advertisers have been paring back spending in order to shore up capital during an uncertain economy. As a result, Roku's platform segment grew revenue by just 15% year over year in the third quarter. However, while that might seem dismal at first glance, viewing this in comparison with other digital advertisers helps provide context. Alphabet's Google grew revenue by 6% year over year, while revenue at Meta Platforms actually declined 4%.
This shows the extent of the industry-wide marketing pullback, driven by the faltering economy. The problem is not limited to Roku, and the company is outperforming its peers. Once things are back on solid ground, advertising should come roaring back, bringing Roku along for the ride.
Profits return
Since the onset of the bear market, Roku has been racking up losses at a dizzying pace, but that wasn't always the case. In fact, turning back the clock to 2021 reveals the company had profits in each and every quarter as well as for the full year.
What changed? The aforementioned advertising slowdown played a big part. Additionally, Roku chose to subsidize the cost of its namesake streaming devices -- rather than raise prices -- even as inflation and supply chain disruptions sent costs skyrocketing.
History shows that without the prevailing and persistent headwinds encountered in 2022, Roku has no problem turning a profit. That's why I predict its profitable ways will return at some point in 2023.
Roku stock will rebound from historic lows
It's been a tough year for Roku shareholders. The stock is down 90% from its peak, but to use a cliché, "It's always darkest before the dawn." Each of the company's biggest challenges can be tied directly to the broader economic picture -- as can its slumping stock price.
Evidence suggests, however, that Roku is poised for a remarkable comeback. Just last week, the company revealed its active accounts grew 16% year over year, while streaming hours grew to 23.9 billion, up 23%. Perhaps more importantly, Roku was the No. 1 streaming platform in the U.S., Canada, and Mexico in terms of hours streamed.
Furthermore, Roku stock is selling for a song -- trading for just 2 times sales, its cheapest price-to-sales ratio ever. Given the reasons for its decline, Roku's industry-leading position, and its bargain basement price, I'm not really taking a big risk when I predict that Roku's stock price will recover in 2023.
