After losing 87% of its value since mid-2021, the stock of Roku (ROKU -3.31%) has been on fire so far this year, with shares up roughly 56%. It's clear that investors felt the stock had simply fallen too far too fast, and a recovery is no doubt on the horizon.
But given the stock's rapid ascent in such a short time, investors are left with a dilemma. Roku faces a very different world than just a few years ago, which has many wondering if the rebound so far this year is sustainable, or if the gravy train has run out of track. Let's look at the ongoing situation to see if Roku stock is still a buy.
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The prevailing headwinds
The economic headwinds that have been prevalent over the past year have masked a compelling opportunity for Roku. In the face of the pandemic, the company suffered supply chain issues that reduced the availability of the connected TVs, set-top boxes, and dongles used to access its platform, thereby slowing its account growth.
Furthermore, consumer discretionary spending has taken a hit in the face of historically high inflation, rising fuel costs, and overall economic uncertainty.
Given Roku's recent results, investor apprehension is understandable. In the fourth quarter, revenue of $867 million was flat year over year. This resulted in a loss per share of $1.70, compared with earnings per share of $0.17 in the prior-year quarter. Active accounts grew 16% year over year, while streaming hours jumped 23%. This shows that while Roku faced obstacles, audiences continued to increase their viewing time.
The prevailing headwinds spooked fair-weather investors, who have taken their eye off the vast and ongoing opportunity, instead focusing on the near-term challenges. A quick review of the landscape, however, suggests that Roku stock could reach greater heights.
A rebound fueled by ongoing secular tailwinds
Helping drive the streaming video boom is the proliferation of free (or lower-cost) ad-supported services, including those recently debuted by Netflix and Disney. Audiences are swarming to these new, less expensive options -- which, in turn, is attracting new services to the fold. In fact, streaming consumption surpassed cable viewing for the first time last year, according to television rating service Nielsen.
That trend is being fueled by a powerful secular tailwind that can't be understated. The major pay-TV providers shed a record 5.9 million subscribers last year, according to data compiled by Leichtman Research Group. This surpassed the previous record of 5.12 million who cut the cord in 2020.
Furthermore, the increasing availability of internet-connected TVs (CTVs) is attracting a growing percentage of advertising dollars. In fact, CTV is the fastest-growing video channel, according to Interactive Advertising Bureau. Ad spending of $15.2 billion climbed 57% in 2021, and once that final tally is in for 2022, it's expected to have increased an additional 39% to $21.2 billion.
There's more. While CTV represented 36% of total viewing time in 2022, the ad spending allocated to CTV wasn't yet proportional to the viewership, accounting for just 18% of video advertising dollars. As the industry-leading aggregator of streaming services, Roku is well-positioned to benefit as marketing spending continues to shift from traditional TV to ad-supported streaming.
Worth every penny
Even in the face of this massive and ongoing opportunity, some investors will still hesitate to buy Roku, because it has rarely been cheap when measured using traditional valuation metrics. The stock is currently selling for 2.3 times next year's expected sales, when most experts agree a reasonable price-to-sales ratio is between 1 and 2.
But this valuation is near an all-time low. Given its industry-leading position, strong secular tailwinds, and growing opportunity, Roku stock is a steal at this price.
