Roku's (ROKU -0.35%) stock is down about 40% over the last year. That has some investors questioning whether it presents an opportunity for this entertainment company or it's a sign of further trouble ahead.

Let's explore the reasons behind the declining share price of this digital media player manufacturer, software licenser, video streaming platform, and advertising business. We might also get some insight into whether the stock is a good long-term bet.

Roku is a successful services operation built on hardware

Roku is perhaps best known for its Roku operating system (Roku OS), which is found on a slew of third-party TV sets and its internally produced streaming devices. Such is the popularity of these products that Roku OS ranked as the best-selling smart TV system in the U.S. for several years running.

While its streaming devices and smart TVs are well known in the consumer space, Roku actually derives most of its revenue from its platform business. This segment delivered $635 million of the $741 million in revenue that the company reported in the first quarter of fiscal 2023, helping it surpass investor expectations.

The platform segment encompasses Roku's managing streaming sign-ups for companies such as Walt Disney and Netflix, as well as marketing sales made for the free ad-supported television (FAST) services it hosts, including The Roku Channel, Paramount Global's Pluto TV, and hundreds of other channels.

The company noted in its Q1 earnings that active Roku accounts had climbed to just over 71 million -- up 1.6 million year over year. Roku also reported more than 25 billion streaming hours during the quarter -- an increase of roughly 4 billion hours over the same period of 2022.

Despite these positive trends, Roku management said macroeconomic issues are affecting profitability.

A weakened ad market dampens expectations

Roku reported that the total U.S. ad market shrank more than 7% year over year in Q1. Management said it anticipates this shrinkage will continue for a while yet.

"We continue to expect the macro trends that have pressured consumer and advertiser spend to remain throughout 2023," explained Roku's CFO Steve Louden during the company's Q1 investor call. "Accordingly, we expect the advertising market in Q2 to look much the same as it did in Q1."

Roku has FAST prospects

While Roku's current outlook is muted, over the long term, green shoots may be appearing. According to industry expert Amagi, FAST viewing hours grew 103% in 2021, with ad impressions increasing 134% over the same period. Meanwhile, Variety Intelligence Platform (VIP) projects FAST ad revenue will rise from just under $4 billion in 2022 to north of $6 billion by the end of 2026.

The growth in FAST advertising is perhaps not surprising considering the pace of cord-cutting. According to eMarketer, more than 95 million U.S. households will likely end their cable subscriptions by the end of 2023 -- a figure that is forecast to reach almost 113 million by 2026.

TV marketers have to go somewhere to get viewership, and FAST seems like a natural fit. So perhaps it's no surprise that at the start of 2023, there were more than 1,200 FAST channels available in the U.S. -- a figure that is projected by Variety Platform Intelligence research to reach over 1,400 in just a couple of months. 

Roku is primed to benefit from the FAST boom

Roku's push for ubiquity allowed the company to become something of a cable box for the streaming era -- a central location offering fast access to a smorgasbord of channels. Underpinning it all is Roku's ad unit.

By default, Roku offers a 70/30 split for the ad-supported services it hosts; channels control 70% of their marketing inventory, while Roku oversees the other 30%. So in a future where FAST plays a bigger role in the streaming ecosystem, Roku's stock will surely look attractive to more investors.

Of course, more FAST channels mean increased competition for The Roku Channel -- where Roku controls 100% of the ad inventory. But whatever the company loses in viewership it may well make up in hosted revenue.

Macroeconomic headwinds won't last forever

For those considering Roku's stock, it makes sense to pay attention to the macroeconomic factors that have dampened the company's own outlook. If recessionary fears continue, and inflation maintains its higher-than-historical average, ad spending could indeed remain muted through the rest of the year. But should things improve -- and the FAST space start to follow its projected path -- then Roku may well be a solid stock bet.