Roku's (ROKU 1.25%) streaming TV platform has been hit hard by recent economic uncertainty fueled by rising inflation, supply chain issues, and the war in Ukraine. Most of the company's revenue comes from advertising, which has become a more challenging market as businesses have become more cautious about spending money.
Unfortunately for Roku, the resulting slowdown in the advertising market caused a reduction in revenue, and investors have responded by fleeing the stock. As a result, as of Aug. 4, 2023, the stock price is down 82% from its all-time high in 2021.
However, as the economy recovers, Roku is poised to bounce back and capitalize on the growing demand for streaming TV.
It benefits from cord-cutting
Investors interested in this company view it as a beneficiary of the cord-cutting trend, which refers to the shift away from traditional cable or satellite TV and toward streaming on platforms such as Roku. As more users make this transition, many expect advertising revenue to follow, creating a lucrative opportunity for the company.
Despite the ad market downturn, Roku has remained a top choice for cord-cutters, making its platform one of the largest and most attractive forums for TV advertising. In the last two years, Roku has seen impressive membership growth, with its active accounts increasing at a compound annual growth rate of 15.5%, from 55.1 million in the second quarter of 2021 to 73.5 million in the second quarter of 2023.
In the last three months, Roku members watched a lot of stuff online -- 25.1 billion hours, to be exact. That's about 3.8 hours of streaming daily for each active account. That's good news for the company because more people are watching shows on its platform than on regular TV. According to Nielsen, traditional TV viewership has decreased by 13% in the U.S., while Roku streaming hours have gone up by 21% around the world.
As the leading TV streaming platform in the U.S., Canada, and Mexico, Roku's large and engaged membership base gives it a significant edge over traditional TV and other streaming services when it comes to reaching cord-cutters and cord-nevers, making it a prime spot for advertisers looking to target these audiences. Once the ad market bounces back, this company's revenue growth and profitability should improve significantly.
The ad market is still terrible
Despite Roku benefiting from the secular growth trends from cord-cutting, it was disappointing to hear that the overall U.S. advertising market saw no growth in the second quarter. Traditional TV advertising saw a drop of 9.4% compared to the previous year's period, and the ad scatter market for cable and satellite TV ads decreased by 17.2%, as reported by Standard Media Index.
In the advertising industry, the term "ad scatter market" refers to the ad inventory that remains unsold during the Upfronts, the name for the annual events during which TV networks and streaming platforms showcase their upcoming shows and sell ad slots in advance.
Brand advertising on the Roku platform also faced quarter-long challenges, especially in the technology and M&E (media and entertainment) industries. The economy's uncertainty has delayed many Upfront negotiations and ad commitments from marketers.
So the ad market remains terrible as of the end of June.
Positioned for an advertising rebound
Roku set itself up for an advertising comeback by crafting fresh and exciting ad formats that captivate viewers on a whole new level. For instance, one ad format it recently released uses artificial intelligence (AI). The company calls this new ad technology contextual AI.
Contextual AI allows advertisers to run their ads alongside the most fitting moments in any show or movie on The Roku Channel. The AI system scans the Roku library for significant plot points that align with a brand's message and displays their ads in real time.
This technology is still in its infancy but could potentially revolutionize ad delivery on streaming platforms. By matching ads to the content viewers watch, the platform's contextual AI can make ads more relevant and engaging, increasing brand awareness and sales.
The company also launched a new initiative called Roku Commerce+ Partnerships, which lets viewers purchase products directly from their TV screens using their remote. It has partnered with major retailers and marketplaces to provide shoppable ads and other commerce features on its platform.
Why the stock is a buy today
Media and marketing intelligence company Magna Global projects streaming TV ad revenue to accelerate to 14.3% in 2024, boosted by an improving economy, U.S. presidential elections, Paris Olympics, and the Euro Football championship.
Considering the solid tailwinds from cord-cutting, a growing and engaged user base, advanced adtech, and expanding content offerings, it is positioned to benefit from a recovering TV ad market. Although some argue investors are currently overvaluing the stock, the company's long-term growth prospects justify a buy. Investing in the company today allows you to capitalize on its success and growth as a leader in the streaming industry. If you're searching for a sound investment opportunity, Roku should be on your radar.
