The past couple of years have been trying for Roku (ROKU -10.29%) investors, but after a precipitous plunge, the streaming pioneer seems to be back in Wall Street's good graces. After losing as much as 90% of its value, Roku has come roaring back, with the stock gaining 68% so far this year.
Even as the company endured a perfect storm of supply chain issues, macroeconomic headwinds, and tough comps, Roku wasn't content to wait for the storm clouds to clear. Management has diligently increased its market share, expanded its opportunity, and prepared for the inevitable rebound.
Investors may not be aware of several recent developments that better position Roku for future success.
Image source: Getty Images.
1. Cord-cutting is accelerating
It's old news that people are ditching cable, but investors may not know that the rate at which viewers are cord-cutting is accelerating at a rapid clip.
In the first quarter of 2023, the top pay-TV providers shed more than 2.2 million viewers, compared with a loss of 1.85 million during the same period in 2022, according to data compiled by Leichtman Research Group. "Pay-TV net losses of about 2.2 million in 1Q 2023 were more than in any previous quarter," according to Bruce Leichtman, president and principal analyst for Leichtman Research Group, Inc.
What's bad news for cable is good news for Roku, as the most likely destination for viewers needing their in-home entertainment fix. The company recently announced that its number of active accounts had grown to 73.5 million. For context, there were about 60 million cable and satellite customers at the end of the first quarter, which means that Roku has more viewers than all the major cable companies combined.
Having access to a viewing audience of that magnitude gives Roku an incredible amount of leverage with advertisers -- which provide the lion's share of Roku's revenue.
2. Guaranteed results
In the world of marketing, there's no such thing as a guarantee, but Roku has set out to change that. Earlier this year, Roku announced its Primetime Reach Guarantee, assuring advertisers that they will reach more TV households on Roku during primetime "than the average program on a top-five cable network on traditional TV."
The common narrative is that ads shown on free, ad-supported TV (FAST) channels are somehow less effective than those shown on traditional TV and cable. Yet Roku has a treasure trove of data on the viewers that frequent its platform, helping ensure that the targeted advertising reaches its mark.
Roku also said the guarantee "brings a key benefit of cable advertising to TV streaming advertising." Marketers choose a date, and "Roku then prioritizes delivery to unique households across The Roku Channel and the additional top 100 channels on the platform."
In fact, in a recent pilot for advertisers, Roku ads were seen by 15% more households "than an average program on a top-five cable network."
By assuring that advertisers will reach their desired audience, Roku made itself much more competitive than traditional TV and cable.
3. Shopping at the click of a ... remote?
Earlier this month, Roku announced what it called "a first-of-its-kind partnership" with e-commerce tools provider Shopify (SHOP 1.11%), allowing viewers to "purchase products directly from Shopify Merchant ads ... simply by pressing OK on the Roku Remote."
This is the latest example of Roku Action Ads, which provides an easy-to-use checkout process directly from the ad itself. This approach offers Shopify merchants an entirely new advertising channel.
Of course, Roku must prove that this innovative approach will result in product sales. The company partnered with Walmart (WMT -0.08%) on a similar campaign last year, so management already has some indication of how to deploy this program best.
The fine print
Each of these developments will work in Roku's favor once digital advertising is back in full swing. While there are suggestions that an ad recovery has begun, challenges remain.
Roku issued its second-quarter financial report after the market closed on Thursday, and the results were encouraging. Active accounts of 73.5 million marked 16% year-over-year growth, and streaming hours of 25.1 billion represented a 21% increase. Roku's platform revenue -- including advertising, a subscription revenue split, and licensing revenue from its connected-TV operating system -- grew 11%, while its device revenue increased 9%.
Investors welcomed the improving results, and Roku stock gained 31.4% in Friday's trading.
I've been pounding the table for Roku for some time, steadfastly suggesting that the company would rebound as advertising spending returned. Now is the time to buy Roku stock before ad spending returns in earnest.
