Streaming company Roku's (ROKU -10.29%) woes started when COVID-19 restrictions began easing in the middle of 2021, and fewer people stayed indoors watching TV. Things only got worse when inflation began soaring, and the Federal Reserve responded by raising rates last year faster than it had in decades. As a result, the stock dropped 82% in 2022.
When Roku released its earnings on Feb. 15, 2022, the results were much better than investors' worst fears, and the stock rose 11%. So, has the stock bottomed, and will it rebound in 2023?
Let's investigate.
Roku is not out of the woods yet
On an absolute basis, Roku's recently released fourth-quarter 2022 results were poor. Although Roku posted revenue of $867.1, beating analysts' expectations of $803.32, growth was only a smidgen above 0%.
ROKU Revenue (Quarterly YoY Growth) data by YCharts.
Even worse, management forecasts first-quarter 2023 revenue of $700 million, which implies a 5% year-over-year decline. So Roku's revenue deterioration continues into 2023.
Management commentary about committing to a path that returns the company to positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in full-year 2024 suggests profitability won't return in 2023 either. So, expect a bleak, near-term future.
ROKU EBITDA (Quarterly) data by YCharts.
However, not everything is gloom and doom.
Roku has positioned itself for a rebound
Increasing monetization has become impossible with the decline of its primary form of monetization -- the advertising market. So the company has focused on growing its user base, increasing engagement, and strengthening its monetization capabilities in the ad market to prepare for an eventual ad rebound.
First, the bigger its user account base, the more attractive it becomes to advertisers. And despite this struggling economy, the company continues to add accounts rapidly. Roku added 9.9 million full-year active accounts in 2022, more than in 2019 or 2021, ending the year at 70 million active accounts globally. Even more impressive, its platform is approaching nearly half the size of all U.S. broadband households.
Second, user engagement is a vital metric for a streaming platform; the longer viewers spend time streaming, the less likely they are to cancel the service, and the better the prospects are for continued user base growth. Those platforms with robust user engagement thrive, and those with only a few users barely watching content often die. Fortunately for Roku, it has strong and growing user engagement.
Image source: Roku.
As you can see above, the platform's global streaming hours grew 19% from 73.2 billion hours in 2021 to 87.4 billion in 2022 These are great numbers considering the current state of the worldwide economy. Additionally, it dominates in its primary U.S., Canada, and Mexico markets by having the No. 1 TV streaming platform by hours streamed.
Perhaps the best part of Roku's efforts to improve its platform is that it is also building solid engagement on its channel, The Roku Channel (TRC), which reached 100 million U.S. households in Q4 2022, with streaming hours rising 85%. In addition, TRC was a top-five channel on the Roku platform by active-account reach and streaming-hour engagement, which bodes well once the ad market comes back to life. Active-account reach is something advertisers look at when deciding where to advertise, as account reach is the total number of different accounts exposed at least once to the possibility of seeing a specific ad during a given period. The more reach a channel has, the more attractive the channel as a destination for advertisers.
Lastly, the president of Roku Media, Charlie Collier, is spending this downtime creating new ad products and strengthening the company's relationships within the media world and programmatic ad market, including third-party, demand-side platforms. Collier, a high-profile media industry veteran and advertising expert, was hired in late 2022 to build a world-class streaming platform for advertising. And once the ad market rebounds, Roku should be one of the preferred destinations for advertisers in a competitive market.
When will Roku stock rebound?
Experts predict growth in the overall digital ad market will look lackluster in 2023 but see a better future for free ad-supported streaming driven by two significant secular trends: Viewers continue to cord-cut and switch to streaming and advertisers are rapidly following those viewers online.
During the Q4 earnings call, management delivered some good news for Roku shareholders when they discussed seeing improvement in some ad verticals in Q1, including health and wellness, restaurants, travel, and consumer package products. Therefore, the streaming ad industry could be in the process of bottoming.
No one can confidently say that Roku's ad business will rebound in 2023. But suppose Roku's ad business is indeed bottoming. Investing in the stock when the market currently values it at a price-to-sales (P/S) ratio of 3.03 could look like a great idea five years from now, especially since its median P/S ratio over the last ten years is 9.47.
