Holders of Roku (ROKU 0.95%) stock have been on a wild ride since the start of the pandemic. The streaming video stock's returns since early 2020 at one point shot above 300% as its platform gained millions of new users. Stock returns turned lower lately, though, thanks to declining advertising sales. Shares are down over 40% since mid-April, 2022.
But is Wall Street overreacting to a temporary growth hangover, or does Roku really have a fundamentally weaker business today?
The bearish reading
Just like its streaming video peers Netflix (NASDAQ: NFLX) and Disney (NYSE: DIS), Roku aims to boost its user base and engagement levels over time. It succeeded on that score in 2022, adding 10 million new users to push its active account base to 70 million. Streaming hours jumped to 87 billion from 71 billion in 2021.
But there's a monetization problem.
While Netflix and Disney have built much bigger subscription-based services, Roku still depends far more on advertising revenue. And because advertisers became more cautious in the past year, Roku's growth in key metrics like gross profit and average revenue per user decelerated sharply.
This slump was amplified by Roku's continued investments in growth. While it booked an operating profit of $235 million in 2021, that spending contributed to an operating loss of $531 million in 2022. The bearish thesis is that Roku will continue to struggle to monetize its growing platform.
The bullish outlook
That thesis ignores some huge assets that Roku enjoys, though. Viewers are clearly enjoying its platform, which increasingly features original and exclusive content. Roku is improving its advertising services while pushing deeper into other revenue streams such as smart home devices and a wider offering of streaming hardware.
There's also the fact that Roku is gaining market share in the massive global TV market. Possessing advantages of scale in this niche will surely pay off once the digital ad market recovers. Streaming is clearly where both consumers and advertisers are moving as engagement shifts away from traditional linear TV. "Our platform and industry leadership positions us well for reaccelerated revenue growth," Roku said in its mid-February letter to shareholders.
Stay tuned
Investors who aren't risk-averse might be happy to buy Roku's stock now and wait for that likely operating rebound. In exchange for the risk of another year or so of weak earnings ahead, you can pick up shares of Roku at a big discount -- just 2.6 times sales, down from more than 6 times sales a year ago. Netflix is trading for 4.2 times sales.
There's also a good chance that things will get worse before they get better. Roku would struggle even more to build a profitable business during an economic downturn. Its 2022 results show that the company is too reliant on the volatile ad market, and investors might want to wait for that threat to lessen before buying the stock.
If Roku was booking expanding net losses in the context of strong revenue growth, its shares would seem like a more obvious value right now. However, given the big questions around sales and monetization, most investors will prefer to watch this stock from the sidelines until there's more clarity on the rebound strategy.
