Roku (ROKU 2.94%) shareholders have had some good reasons to tune out when it comes to the streaming video platform company. Its revenue growth slowed to a crawl through late 2022 even as its operating losses expanded. And in early November, management projected that revenue would decline in Q4 for both its hardware and content platform divisions.
Yet its shares have rallied in 2023, in part due to encouraging financial news from rival Netflix. Let's look at the main factors driving Roku stock's action early this year.
Not diverse enough
While Netflix has won praise from Wall Street by moving into the digital advertising business, Roku's recent results show that this is a poor operating model to rely on for most of your growth. The platform grew users and boosted engagement hours through the first three quarters of 2022; yet its advertising revenue still fell due to macroeconomic pressures. By contrast, when Netflix adds subscribers, its revenue and cash flow rise significantly.
Roku's executive team has implicitly acknowledged a need to pivot to a more diverse monetization model. The company is bulking up its smart home services, adding more content to its proprietary channel, and innovating around ad delivery and tracking. Yet, Roku won't achieve a valuation approaching Netflix's until it can demonstrate more predictability in its core sales metric.
High engagement
On the bright side, Roku's value proposition for its customers is as clear as it has ever been. The inputs here are adding quality content, improving the discovery process, and innovating on hardware. If a company can win in these areas, it should see higher engagement and monetization over time.
And investors don't have to squint to see evidence of Roku's successes in those arenas. It added more than 2 million net new users in Q3 and nearly doubled the number of streaming hours for The Roku Channel. Average revenue per user rose 10% year over year to $44.25. Smart investors will recognize that these metrics should lead to higher earnings over time, notwithstanding the current industry downturn.
Looking ahead
Roku's management said in November that it couldn't predict when economic conditions would rebound, and that's the key reason why it projected lower revenue in Q4. Most Wall Street pros are forecasting revenue contraction through Q1 2023, in fact.
That outlook could shift dramatically after the release of Roku's Q4 report, which is due out in mid-February. That report will reveal whether the streaming company saw faster user growth in late 2022 as Netflix did. It should also give investors a clearer sense of the likely timeline of Roku's return to net profitability.
There are major risks for shareholders heading into 2023, mainly due to Roku's reliance on the volatile video advertising market. These factors might convince some investors to watch the stock from the sidelines, at least until they get firmer answers to some of these growth and profitability questions.
On the other hand, Roku's stock has rarely been this cheap, and it now trades at a price-to-sales ratio that is less than half of Netflix's. That could be an attractive entry point if you've been impressed by the company's expanding influence in the streaming video industry.
Sure, the monetization challenge it faces right now is real. But given Roku's ability to deliver more value for consumers and advertisers, its profitability issues are likely only temporary.
