This has been a year of some unlikely market leaders, and one of the biggest surprises is Roku (ROKU -0.32%). Shares of the company behind North America's most popular operating system for TV streaming are up 85% in 2023, fueled partly by an 11% surge on Tuesday after announcing an intriguing partnership with Shopify (SHOP -0.41%).
However, as my colleague Will Healy astutely points out, the same Roku stock that's dazzling investors this year is also down 85% since hitting an all-time high this month two years ago. Harkening back to the old Wide World of Sports intro, an investment in Roku embodies both the thrill of victory and the agony of defeat.
Why has Roku nearly doubled this year? Why has it still cratered since peaking two summers ago? More importantly, is it too early or too late to buy Roku stock right now? Let's push the play button on the Roku remote as we dive into all three questions that every investor or potential investor needs to answer.
Channel surfing
There's no shortage of stocks that skyrocketed through the latter half of 2020, continuing to soar heading into 2021. They are typically companies that were deemed to be beneficiaries of the new normal when the COVID-19 crisis hit and people were going to spend a lot of time working, learning, and entertaining at home.
Many of those early pandemic leaders would go on to crash once it became clear that things would be returning somewhat to normal. Unlike the top players in telehealth and videoconferencing that have simply marched in place in 2023, Roku has moved higher as investors realize that the business is still clicking on most cylinders.
Spending more time away from home hasn't diminished our appetite to stream TV. Roku's audience and engagement levels have never been higher. The record 71.6 million active accounts that Roku was literally and figuratively serving in its latest quarter is 17% more than it was entertaining a year earlier. The total hours streamed have soared 20% in that time.
Image source: Getty Images.
It's not all good news. Net revenue rose just 1% in its latest quarter, as the macro environment for TV advertising has been slumping since last summer. Roku has also posted losses for five consecutive quarters, as acquiring content, rolling out new products, and the promotional nature of subsidizing hardware to score new viewers eat into the business. Thankfully the deficits are finally starting to contract sequentially and there are signs that the connected TV advertising market is bouncing back.
This week's Shopify news may not necessarily move the needle. It's exciting on the surface. Roku is partnering with the e-commerce giant to allow viewers to buy products from Shopify merchants using Roku Action Ads. If you were an advertiser you could be sure that you would be willing to pay more for a lead if consumers could initiate the purchase of your product or service right from their TV. The reality check here is that Roku has announced deals with individual brands and food-delivery services before. It hasn't turned average revenue per user around. Shopify tosses out a much larger net of potential sponsors, but it's easy to be skeptical until it delivers material results to Roku's coffers.
Roku continues to be my favorite streaming service stock, and I don't think it's too early or too late to establish a position in the industry pioneer. Revenue is 29% higher in its latest quarter than it was two years ago, when the stock peaked more than 5 times higher than it is now. There may have been too much hype helium in the shares at the peak, but the same can be said about the unwarranted pessimism that sent the stock spiraling downward through the end of last year. This rally appears to have legs because the positive headlines and upticks are starting to catch up to a platform that continues to be more popular than ever.
