Despite macroeconomic headwinds that are hurting the consumers' ability to spend on discretionary items, as well as a softer digital advertising market, Roku (ROKU -8.74%) continues growing at a healthy clip. 2022 revenue of $3.1 billion represented a 13% increase year over year. And the business now counts 70 million active accounts, a 16% jump from the end of 2021.
With the streaming service company's shares down 88% from their peak and now selling at a below-average price-to-sales multiple of 2.6, is Roku a no-brainer buy right now? One jaw-dropping statistic says, "Yes."
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Too many choices
Antenna, a research firm that focuses on providing data on subscription services, reported that streaming service cancellations in 2022 were up 49% year over year in the U.S. This coincides, unsurprisingly, with a continuously rising churn rate among consumers. The blame could go to higher inflation crimping disposable income to spend on entertainment, but cancellations have been on the way up for a while now. Instead, this might be a clear sign that consumers think they have too many choices in front of them that are starting to cost too much.
Right now, I have subscriptions for Netflix, Warner Bros Discovery's HBO Max, Amazon Prime Video, Walt Disney's Disney+ and Hulu, and Comcast's Peacock. Do I watch enough TV to justify having all of these? The answer is definitely no. In total, the combined monthly cost of these services can rival what a traditional cable-TV subscription charges.
The secular shift that is the cord-cutting trend is expected to hit a milestone in 2023. This year, less than half of the households in the U.S. will have a cable-TV subscription, the first time this has happened. And it's likely that this will continue in the decade ahead. But with so many viewing options at their fingertips nowadays, consumers' increasing cancellations are an indication that less might be more.
This could benefit Roku
Roku could benefit from this type of behavior. First off, Roku prides itself on being an agnostic streaming platform, so it doesn't really care what service attracts the most subscribers and dominates the industry.
As long as there are at least a handful of streaming choices, there should always be a need for Roku's services. And even with a higher number of cancellations, the typical U.S. household still has about four subscription video-on-demand services at a time, according to ad-tech firm MNTN. Roku can put all of these services in one place for a better user experience, highlighting its value proposition.
Then there's The Roku Channel, the company's popular destination for free shows and movies. "In Q4, it was a top 5 channel on the Roku platform by Active Account reach and Streaming Hour engagement," management said in the Q4 2022 shareholder letter referring to this offering. The Roku Channel has now reached U.S. households with 100 million people, making it one of the most popular free ad-supported services on the market. And the fact that it's a free option can certainly help to draw in viewers at a time when they're cancelling their other subscriptions at record levels.
Moreover, The Roku Channel can be viewed as a key competitive strength for the business. Its popularity drives ad dollars to the platform, which then attracts more viewers. And more viewers then make Roku a more compelling place to increase ad spending even more. It's a flywheel effect that gets stronger over time.
Because Roku has the leading market share in the U.S. among smart-TV operating systems, it's in an advantageous position to gain by continuing to spearhead the cord-cutting movement. Investors looking to put some money to work in the streaming space might view the stock as a worthy addition to their portfolios, especially at a time when competition among content producers has never been higher.
