After Roku (ROKU -10.29%) shares were decimated in 2022, this year is shaping up to be a revival of sorts. Investor optimism toward the company is rising, as is the stock price, which is up 51% so far in 2023. The thinking might be that the worst days for Roku are a thing of the past.
To get a better understanding of this streaming stock, investors should take a closer look at both the bull and the bear cases. This information will be critical to making an informed investing decision.
Bulls point to the platform's dominance
Amid a softer macroeconomic environment, a situation worsened by high inflation and rising interest rates, Roku still posted solid gains in key metrics. The company grew its active accounts 16% in 2022 to 70 million, hours streamed jumped 20% to 87.4 billion, and average revenue per user was up 2% year over year in the fourth quarter. These are healthy increases, despite what has been an unfavorable industry and economic backdrop. Once the market bounces back, the belief is that Roku should get a boost, too.
According to the management team, Roku has a leading market share among smart-TV operating systems in North America, so it should benefit over time as more ad dollars shift to connected TV. In 2022, about half of total TV viewing time was spent streaming content. But only 22% of TV ad budgets were directed to streaming. Leadership thinks that this gap must close over time, which provides a meaningful tailwind for Roku and its prospects.
Another strong argument for owning Roku is that it is riding the broad secular trend of the rise of streaming entertainment. According to eMarketer, there will be more households in the U.S. this year without a cable subscription than with one. And by being a platform that connects viewers, content companies, and advertisers, Roku is well-positioned to benefit as more households cut the cable TV cord. Even more impressive, businesses like Netflix and Walt Disney can continue spending tens of billions of dollars every year to produce and license content to drive subscriber growth. Roku can avoid these huge capital outlays by simply being an aggregator.
Bears call out the troubling financials
The downturn of the digital ad market has been a hindrance to many businesses, Roku included. Its Q4 2022 revenue was only up 0.2% year over year. And a slowdown is the last thing Roku needs, as its net loss totaled $498 million last year. But the question remains when, if at all, Roku can be sustainably profitable. Even at 70 million active accounts today, net income remains elusive, which is worrisome.
Inflationary pressures have also negatively impacted Roku's operations. The business posted a gross profit loss in each of the past seven quarters in its hardware segment, losing money any time a customer buys Roku's media players. That's a clear headwind to achieving overall profitability.
A worthwhile activity that investors should do when looking at companies to own is to try and understand the value chain of the applicable industry. In Roku's case, its suppliers are essentially major content companies, like Netflix, Disney, and Alphabet's YouTube. These massive entertainment businesses can have their way in negotiations with Roku, choosing not to give any ad inventory to the streaming platform, like what YouTube does. Because these services are essential for Roku to attract and retain accounts, it must always play ball with those media powerhouses.
Roku might be the leading smart TV operating system in the U.S., the world's largest economy, but the business trails behind the combined dominance of Google Chromecast and Android TV in international markets, most notably in Europe, Asia, and South America. Because streaming entertainment penetration overseas is far behind the U.S., this might mean Roku will potentially miss out on sizable growth opportunities in different countries as more consumers in these areas decide to cut the cord.
With this valuable information in mind, investors must weigh the bull and bear arguments before deciding what to do with Roku stock.
