There are always dips, jumps, and slides to be expected in any stock's journey, but sometimes they look more like mountains than molehills. Roku (ROKU -10.29%) stock soared as a pandemic favorite, then plunged in the aftermath. It's now up 140% this year as investors are finding favor in growth stocks again.
The uncertainty of the past three years might continue to play out in the coming three years. Let's go through some scenarios about where the stock might be in that time frame.
Still an emerging market
With the woes of premium streaming companies like Walt Disney and Paramount dominating the conversation and the seeming saturation in the market, it's easy to overlook the fact that streaming hours still do not represent anywhere near the majority of U.S. viewing time. According to Nielsen, streaming hours accounted for 34.8% of total U.S. viewership in July, overtaking cable hours, at 34.4%.
This benefits Roku in several ways. Streaming itself is still an emerging category, and it's on its way to overtaking cable as the preferred viewing method for paying subscribers. Since Roku has partnerships with all the major premium streaming companies, it enjoys overall increases in the category.
But since it also offers free, ad-based streaming, it can capture market share from the broadcast category as well. Many of these viewers aren't likely to purchase a streaming membership, even the cheaper, ad-based tiers, and they rely on free content. Roku provides that for them, which leads to more viewing hours, which in turn leads to more advertising dollars.
It's a slow journey
After the initial surge of streaming coinciding with stay-at-home orders related to the COVID-19 pandemic, most streaming companies have seen their growth numbers slow down or decline. But competition is fierce, requiring deep investments in content creation and marketing. Revenue numbers are increasing for the most part, but so are operating losses.
Roku's model is different from that of most premium streamers since it also sells hardware, and it's a free service. It's also investing in content for its Roku channel, where it also streams content from partner companies, and it relies on advertising dollars to make money.
The hardware business is strong, and it's the No. 1 operating system (OS) in the U.S., up against fierce rivals including Amazon. Management sees this business as a channel to acquire subscribers, where its more lucrative business happens.
The device segment is back to growth as supply chain problems have eased, and both the device segment, which is what Roku calls hardware sales, and the platform segment, which is advertising and partnerships, posted sales increases in 2023's second quarter. Total company sales increased 11% over last year, with an 11% increase in platform revenue to reach $744 million, and a 9% increase in device segment revenue to reach $103 million.
However, it doesn't appear to be anywhere near profitability, which it reached for a short time during the pandemic. Its operating loss of $126 million was significantly better than the past three quarters but worse than a year ago at $110 million in the second quarter.
Meanwhile, it saw a loss of $18 million on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis. That was better than the past three quarters but worse than last year's $12 million. Management is guiding for third-quarter adjusted EBITDA of $50 million, or worse than last year's $34 million.
Are we there yet?
It's not easy right now, as advertisers are slashing budgets due to inflation. The near term continues to look bleak, and investors shouldn't expect Roku to advance its profitability in this climate. However, this should be a short-term challenge -- even though it's lasting a bit longer than hoped.
In the meantime, Roku is demonstrating solid signs of consumer engagement and is well-positioned to benefit from macroeconomic improvements ahead. Active accounts increased 16% over last year to 73.5 million, and that has also been sequentially improving. Streaming hours held steady sequentially but were up 21% from last year.
Average revenue per user was a sore point in the second quarter, decreasing 7% from last year. That's coming from an increased number of active accounts with ad revenue not keeping up. Is that a worry? Not yet. It's likely to change when advertisers can increase their budgets, and right now, at least it's generating strong viewership to entice advertisers later.
Roku is also busy with its device business, branching out into more Latin American markets. It was the No. 1 smart TV operating system in Mexico for the third quarter in a row.
Three years is a long time
Three years from now, the streaming landscape should look vastly different. Some players may merge or be acquired -- things that are already starting to happen. Cord-cutting will continue to take place, and streaming will be a more prominent part of media and entertainment.
When Roku will become profitable is another story, and that's not clear right now. There's too much uncertainty to say how this will play out, but it's likely to turn a corner when advertisers rebound.
Roku has a robust and differentiated business, and it could eventually be a great long-term holding. However, investors shouldn't expect too much progress in the current environment.
