Roku (ROKU 0.94%) stock has experienced a wild ride since the beginning of the pandemic. Higher-than-normal streaming usage and a fast-growing ad business took the stock to nearly $491 per share at the height of the bull market.
Unfortunately for Roku bulls, the stock would go on to lose nearly all of those gains, and today it still trades about 88% below that high. Nonetheless, the platform's popularity continues to increase, and a recovery in its ad market could not only reverse its decline but send the entertainment stock to new highs.
Roku's struggles
Roku manufactures and sells a variety of digital media players for video streaming. It also operates an ad-supported video-on-demand service. In the past few years, Roku benefited from a first-mover advantage in North America and a pandemic that left people spending more time inside than usual. This led to front-loaded growth that slowed to a crawl once its users resumed their previous offline activities. Moreover, while it remains the leading streaming platform, it competes with well-resourced tech giants such as Samsung, Alphabet, and Amazon. That could leave it at a considerable disadvantage.
Additionally, amid a sluggish ad market, the slowdown is real. In the first quarter of 2023, revenue of $741 million represented year-over-year growth of 1%. Even with some recovery in device revenue, the 1% drop in revenue from the platform, which generated 86% of all revenue, reduced growth. Average revenue per user (ARPU) dropped by 5% to $40.67. And that disappointed the market when compared to the 13% revenue growth in 2022 and the 55% increase in 2021.
Furthermore, its Q1 2023 net loss came in at $194 million, far higher than the $26 million loss in the year-ago quarter. The losses occurred as the cost of platform revenue and operating expenses surged considerably higher. Given this performance, one might understand the pessimism surrounding the stock.
Why Roku stock could still be a buy
However, investors have plenty of reason to believe in Roku, not just because it is one of the largest Cathie Wood investments. Despite its competition, customers continue to join its ecosystem. In Q1 it reported 72 million active accounts, 17% more than in the same quarter in 2022. Also, during that period, users collectively streamed 20% more hours year over year.
This shows that its problem is ad revenue. Given the state of the economy, ad spending is likely at a low point in the cycle, implying that an improvement in the economy could bring back double-digit revenue growth.
Wood and her team at Ark Invest seem to agree. In fact, Ark is so optimistic that it forecasts revenue of $14 billion in 2026, with massive increases in video advertising and content distribution driving most of that growth. In comparison, Roku reported revenue of just $3.1 billion in 2022. Ark management believes that will take Roku stock to an expected price of $605 per share by 2026. That would amount to nearly a 10-fold increase in just three years!
Admittedly, that forecast could prove wildly optimistic, and even Ark Invest outlined a bear case where the stock rises to just $100 per share. Nonetheless, Roku has risen as high as $491 per share, showing how far the stock can climb when the ad business delivers massive growth.
Consider Roku stock
Although Roku looks like it may be in trouble, investors should take a more holistic view of the company. For one, its user base and streaming hours continue to grow rapidly. This shows that Roku has a revenue problem, not popularity challenges.
Additionally, revenue issues are more likely a product of a cyclical downturn. It remains unclear whether Roku can reach Ark Invest's 2026 price target. But once the ad market returns to growth, the rising customer base should bring back the massive growth in revenue and, by extension, a recovery in Roku stock.
