Roku (ROKU -0.92%) is rocking in 2023. Shares of the streaming video pioneer have risen 58% so far this year. The big gain might surprise you, and that's understandable. Starting lines matter, and this year's chart may look great, but Roku is still trading nearly 87% below the all-time high it established two summers ago.
Wall Street isn't exactly awestruck by the stock's resurgence. It's not even registering. The last analyst to initiate coverage of Roku -- Vikram Kesavabhotla at Baird -- tagged it with a yawn-worthy neutral rating last week. The $71 price target implies just 10% of near-term upside, a poor haul for a risky growth stock.
Dig deeper and you'll probably like what you see in Roku. It's been quietly clawing away at the bearish knocks on the company. It may not be obvious to everyone. Give it time. Patience can be a lost art in the world of investing.
Revenue channel surfing
Let's start with a small ceasefire. Roku is a free platform to use. It sells its dongles -- for those who don't already have a smart TV with Roku's operating system installed at the factory -- at a loss. Its business model is at the mercy of advertising and revenue sharing deals with the thousands of apps it hosts on its popular platform. The ecosystem is similar to the leading app stores, and sometimes it can be just as draconian as the tech giants that dominate the smartphone market.
HBO Max wasn't available on Roku when it launched, for example. The same thing happened late last year when Walt Disney introduced a cheaper, ad-supported tier for Disney+ subscribers. The original Disney+ offering for $10.99-a-month was accessible through Roku's hub, but the new $7.99-a-month plan with ads was not added for the growing number of Roku users. The two sides couldn't agree on the terms of the arrangement, and it was a lose-lose standoff. Roku likely lost some accounts. Disney+ lost out on a huge audience to push its ad-backed streaming service.
The boo birds were everywhere in early December when the situation unfolded. The two parties came to undisclosed terms on an ad-sharing arrangement earlier this month. The battle is over, but the proclamation of war four months ago was louder than the favorable resolution in April. Yes, the clawing is quiet in this silent revolution.
Image source: Getty Images.
A big knock on Roku is that its deficits keep widening sequentially after its brief dalliance with profitability in 2021. Analysts don't see Roku back in the black until 2027. It's been investing in content for its proprietary channels. It's ramping up its consumer offerings. It's spending money on expanding its reach, making sure that it continues to command roughly double the market share of its nearest rival in North America. None of this comes cheap.
However, Roku is also starting to listen to its bean counters. It announced layoffs last month, amounting to 6% of its workforce. It also announced plans to exit or sublease offices that it doesn't currently occupy. Management also emphasized that it will "prioritize projects" that Roku "believes will have a higher return on investment" going forward. This sounds like a company that isn't going to wait four years to become profitable again.
Even before playing nice with Disney+ and its commendable shift in the direction of fiscal prudence, Roku was already smacking down the bear thesis that the platform would lose its relevance as customers exited the "shelter in place" phase of the pandemic. Roku is still growing. The net addition of 9.9 million active accounts in 2022 is the second-best year of growth for the company. Hours streamed is growing even faster than user growth, so engagement is rising -- not falling.
Average revenue per user posted a rare sequential dip in Roku's latest quarter, a sign of the weakening advertising market late last year. However, with the economy showing some signs of life it's easy to see marketers returning to reaching the captive audiences that reside in Roku's 70 million households. Its guidance back in February called for an end to the sequential widening of quarterly red ink in the first quarter, and that was before the pink slips in March and the ad-supported mouse ears in April.
It will take a long time for Roku stock to take out its 2021 highs, but that doesn't mean it can't continue to deliver market-thumping returns the way it has this year. It is still a bellwether for streaming video stocks. Baby steps forward on the ad revenue and bottom line fronts can lead to not-so-baby steps forward in the stock price.
