Streaming specialist Roku (ROKU -9.61%) has seen its financial results and stock price suffer over the past year. It owes these challenges to broader economic problems that have led to lower revenue and rising expenses -- a bad combination for any company. However, there is one aspect of Roku's business that has been consistently getting better. Let's examine what it is and why it matters for the company's long-term prospects.
An expanding ecosystem
Roku's first-quarter update was somewhat better than expected, although on many fronts, the company's performance remains (very) far from what it was in 2021. Revenue of $741 million was well above management's guidance of $700 million, but it only increased by 1% compared to Q1 of the previous fiscal year.
The company also reported a better-than-expected gross profit, with this metric coming in at $338 million, ahead of its projection of $310 million. But Roku's gross profit declined year over year, to the tune of 7%. There were even more worrying signs, with Roku's average revenue per user decreasing by 5% year over year to $40.67, its expenses still rising, and the net loss per share deepening from $0.19 to $1.38.
But there was one piece of good news: Roku said that it is still the top-selling television operating system (OS) in North America, with a market share of 43%, compared to just 38% as of the end of 2022. In other words, Roku has gained ground over the past few months, and this is further reflected in the company's active accounts, which increased by 17% year over year to nearly 72 million (71.6 million, to be exact).
Roku has long stressed the importance of growing its ecosystem of active accounts. That's why it chose to insulate consumers from the higher costs of getting its namesake streaming devices to the market last year -- despite these higher expenses, the company did not raise its prices. Let's dig into why Roku's active account growth is so significant.
The economy will rebound -- eventually
Roku makes the majority of its revenue from its platform segment, which records advertising sales -- its most important moneymaker -- and other services it offers streaming providers, such as the option of adding custom buttons to Roku's remote controls. It is arguably building a network effect, where the value of its platform increases as more people use it. The more viewers within its ecosystem, the more streaming channels will seek to join in.
And it will also become an increasingly attractive hub for companies looking to advertise their products. Meanwhile, consumers benefit from more streaming options on the platform. While Roku's revenue growth rates have declined because of economic-related factors, once those end, its advertising (and overall) sales growth should rebound precisely because of the large and expanding ecosystem that makes it such an attractive platform for targeted ads.
Roku's management has mentioned several times that while the switch from linear television to streaming is ongoing, businesses have yet to fully adapt since advertising dollars continue to flow mostly to the former. As businesses catch up and continue to pour more ad money into streaming, Roku will benefit thanks again to its extensive network of accounts.
The bottom line for investors is that although Roku has been struggling over the past year -- something that will continue given its economic troubles remain -- the company is positioning itself for the long term. The steady takeover of streaming services, the decline of linear television, the company's growing accounts, and the ad market adjusting to the shift to streaming all provide powerful long-term tailwinds for Roku.
That's why the company's stock may still be worth buying, especially as it remains down by 38% over the past year.
