It's fair to say that Roku (ROKU 0.15%) is going through a rough patch. Shares of the company behind the country's leading streaming-video hub have plummeted 87% since peaking two summers ago. The stock opened higher on Thursday, but only because it has announced another round of layoffs.
Roku will be eliminating roughly 200 employees (6% of its workforce) as it moves to improve its cost structure. The move -- which also includes exiting or subleasing offices that it doesn't currently occupy -- will result in a total of $30 million to $35 million in one-time charges. A lot of companies have been trimming their head count lately, but it doesn't make corporate retreats any easier to stomach.
I still see Roku trading higher a year from now, and possibly even substantially higher. Why am I an optimist when it's raining pink slips. Grab a sofa. Cradle the remote. Let's go channel surfing through the bullish argument for why Roku could be a more valuable investment by the springtime of 2024.
There's always something good on TV
The bearish case on Roku is as clear as the picture on an OLED TV. The streaming pioneer broke into profitability through the first few quarters during the pandemic, but it's decidedly in the red right now. Last year was brutal on the bottom line, with losses getting larger with every passing quarter.
As a free ad-supported operating system, Roku is at the mercy of advertising. It's a rough place to be right now, with marketers paring back how much they're willing to spend to generate leads and brand awareness. the company recently posted the first sequential dip in average revenue per user in its nearly six years of public trading.
It has a cash-rich balance sheet and is a niche leader, but its three largest competitors are all among the country's four most valuable companies by market cap. Can Roku continue to dominate the market selling dongles and striking deals with smart-TV manufacturers when three of its rivals have greater financial resources?
I think I have most of the bearish points covered, so let's dive into the reasons to be bullish. Roku's popularity keeps growing. It closed out 2022 with 70 million active accounts, nearly 10 million more than it had a year earlier. Nearly half of that growth took place in its latest quarter, not a surprise given the seasonality of the business with a spike during the gift-giving holiday season.
But at the end of the day, it's not just the number of homes powering up Roku. Engagement is also on the rise, with the average time spent on the platform per day growing from 3.6 hours a year ago to 3.8 hours now.
Image source: Getty Images.
Average revenue per user declined 5% between the third and fourth quarters last year. The audience and streaming hours are larger, but ad spending has turned cautious in this iffy economy.
At least one analyst thinks that the tide is starting to turn on that front. Susquehanna upgraded the stock on Monday, arguing that the scatter market -- the ads that aren't initially bought during the industry's up-fronts season -- seems to be turning the corner after bottoming out late last year. The analyst's $75 price target on the shares doesn't seem to offer a lot of near-term upside, but let's get into why Roku could be even higher than that a year from now.
In Thursday morning's 8K filing with the Securities and Exchange Commission announcing the restructuring, Roku is signaling a shift in its capital allocation. Management says it will "prioritize projects" that Roku "believes will have a higher return on investment."
There isn't a lot of color beyond that statement, but it's easy to connect the dots. Roku's belly flop into the red over the past year has stemmed from big investments in content and products as well as cutthroat pricing on its dongles to maintain its market share at almost double its nearest competitor. Supply chain snags also didn't help at one point.
Before this week's restructuring announcement, analysts didn't see the company turning a profit until 2027. That's an eternity in today's discerning market, but those icy waters could be warming up. There's little reason to expect Roku to stop growing, especially as it expands its presence internationally. As long as the teetering economy doesn't tumble, the connected-TV advertising market should continue to recover as marketer spending pivots away from traditional linear TV.
Roku won't revisit its 2021 all-time high just above $490 anytime soon. Market valuations have contracted, and there was a blast of helium in streaming stocks early in the pandemic that isn't justified at the moment.
Streaming video stocks remain a promising niche for investors, especially once weaker players start shaking out. Roku is flush with cash and trading at an enterprise value that is just 2.5 times its trailing revenue. If the timeline for a return to profitability starts to contract as its advertising business recovers, the stock could be back above $100 in a year, while still fetching a reasonable revenue multiple.
There could be plot twists along the way -- perhaps even an outright acquisition by one of its distant and jealous but cash-rich rivals -- but the static is starting to clear.
