After losing as much as 82% of its value last year, Roku (ROKU 2.57%) stock has come roaring back in 2023, with shares up 100% so far this year (as of this writing). Investors no doubt believed the selling was overdone, particularly as the recovery shapes up and secular trends continue to fuel its growth.
However, given the stock's blistering gains in such a short time, investors find themselves on the horns of a dilemma. The media landscape has changed drastically in recent years, and many investors wonder if the stock has simply come too far, too fast.
Let's take a look at the current situation to see if Roku stock is still a buy.
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The prevailing headwinds
To be clear, Roku faced several gale-force headwinds last year that battered the stock. The global pandemic caused lingering supply chain issues that limited the availability of dongles, set-top boxes, and connected TVs (CTV) consumers use to access its platform. This, in turn, caused the company's growth to suffer. High inflation and economic uncertainty also pressured consumer spending, further weighing on its growth.
Given Roku's results last year, it's easy to understand investor unease. The company closed out 2022 with revenue that was flat year over year, while its net income swung to a loss. On the bright side, however, active accounts grew 16% year over year, while streaming hours climbed 23%, which shows that existing viewers increased their engagement.
Roku makes the lion's share of its revenue from the digital ads that appear on its platform. Unfortunately, in times of uncertainty, advertising budgets are among the first to face cuts. Roku found itself dealing with a shortage of streaming devices and ad revenue that slowed to a crawl.
Yet even as the changing landscape and prevailing headwinds sent fair-weather investors running for cover, secular tailwinds continue to work in Roku's favor.
A rebound fueled by ongoing secular tailwinds
So far this year, Roku has staged a remarkable comeback. Device revenue rebounded, up 9% year over year, while platform revenue -- primarily digital advertising -- grew 11%. At the same time, active accounts and streaming hours grew 16% and 21%, respectively. This illustrates that the worst is likely over, and Roku is on the road to recovery.
Helping fuel its rally is the ongoing secular decline of cable TV. In the first quarter, the major pay-tv services lost 2.2 million subscribers, worsening from 1.8 million in the prior-year period and the most ever in a single quarter, according to data compiled by Leichtman Research Group. It's no mystery where young, tech-savvy viewers go to get that in-home entertainment fix -- streaming video -- and Roku is the principal beneficiary.
There's additional evidence of the growing domination of online services, as streaming viewing surpassed cable for the first time last year, according to television rating service Nielsen.
Furthermore, the debut of several popular, free, or lower-cost ad-supported services is helping accelerate the death of cable. Netflix and Disney introduced such tiers in recent years, which helps illustrate the trend. The popularity of connected TVs and similar devices makes it a snap to find viewing options, and Roku is at the forefront.
The increasing proliferation of CTV is pulling in a growing percentage of advertising dollars. CTV is one of the fastest-growing segments, according to Interactive Advertising Bureau (IAB). Ad spending of $18.6 billion climbed 22% in 2022 -- capturing 39% of the U.S. digital video ad market.
Perhaps most importantly, ad spending on streaming channels is expected to surpass linear TV (cable and broadcast combined) by 2025, ramping up to 68% of ad spending by 2027, according to estimates compiled by industry analysis firm TVRev. This suggests that industry veterans are spending their money where the viewers are -- streaming video -- and Roku is well positioned to capitalize as ad dollars continue the shift from linear to ad-supported streaming.
Roku is a steal at this price
Despite the sizable and growing opportunity, some investors just don't get Roku. As a result, the stock is selling for a song. Roku is currently valued at roughly 3 times next year's sales, still near its all-time low. Given the company's industry-leading position, growing opportunity, and strong secular tailwinds, it's not too late to buy Roku. But don't wait too long.
