Media-streaming technology veteran Roku (ROKU -10.29%) crashed hard in 2022 and started a respectable rebound in 2023. But you can't call it a full recovery -- Roku's stock price is still down by 79% in two years.
Many investors wonder whether Roku is a strong buy at these prices -- or perhaps it's down in the dumps for good reason. I don't want to keep you in the dark much longer, so let me just tell you why I think the Roku bulls have the right idea.
Why Roku took a harsh haircut
Roku's formerly soaring stock started to slide in the summer of 2021. Many investors saw the company as a direct beneficiary of the coronavirus lockup era, where remote work and online entertainment could do no wrong. That dark conclusion gained some real-world support when Roku's user engagement fell in an otherwise strong second quarter of 2021.
With looser COVID-19 restrictions, people spent less time in front of the TV and more at favorite haunts like restaurants and travel destinations. The golden age of remote everything was over.
The downturn hooked into the inflation crisis a few months later, which left no room for lofty stock valuations on seemingly risky companies. At the same time, Roku's top-line growth slowed down and bottom-line earnings turned negative. Roku's management decided to take the brunt of the economic crisis rather than pass it on to its customers through higher fees and more expensive streaming devices.
The upside to Roku's downside
Roku's strategy has been costly, resulting in deeply negative earnings and limited revenue growth. But did it have the desired effect of boosting the number of active Roku users?
Let's see. Roku had 55.1 million active accounts in the second quarter of 2021. The average user spent 316 hours viewing content on Roku devices in that period. Fast-forward to the second quarter of 2023. Here, the user count increased to 73.5 million names who spent an average of 341 hours in front of their Roku-powered entertainment devices.
That's a 33% uptick in active accounts, and the average user engagement rose by 8%. Total revenue climbed 31% higher. Meanwhile, the earnings line swung from a net profit of $0.52 per share to a loss of $0.76 per share in two years. I call that a successful growth push, albeit an expensive one.
I'm buying Roku hand over fist -- how about you?
In my view, Roku could see roaring financial results when the economy gets back into shape. The struggling digital ad sales should skyrocket after two years of minimal marketing budgets. Ad space is limited, and demand for that asset will be high, resulting in higher prices for Roku's ad spots.
Smart-TV sales have been slow during the inflation-driven predicament. That's another revenue driver just looking for an excuse to take off. Will the upturn arrive in time for the 2023 holiday season?
Maybe not, but there are always next year's holidays. The full recovery could come in stages, giving investors more time to accumulate Roku shares at a bargain-bin discount.
Don't forget about Roku's long-term growth prospects. It works within the media-streaming industry, which is replacing old-school broadcast channels such as cable, satellite, rabbit-ear antennas, and cinema screens at breakneck speed.
The shift will take a few years, but the endgame is the same: an addressable market measured in billions of households. The 73.5 million active households today are a good start but will look quaintly forgettable in the end.
These are the early days of a future industry giant, folks. This has been my favorite stock to buy for more than two years, and the buying window is still wide open.
Feel free to double-check my assumptions and do your own research -- I'm sure you'll find a lot to love about Roku's low price and incredible business prospects. It's not too late to buy into Roku's lengthy price dip.
