Roku (ROKU -10.29%) is arguably one of the more frustrating stocks for investors. After reaching a high of over $490 per share in the 2021 bull market, nearly all of the stock's gains were wiped out in the subsequent bear market.
Investors saw some recovery in 2023 as Roku's stock price more than doubled from the December 2022 low of $38.26 per share. But the stock still trades 83% below its all-time high at a time when other digital advertising-related tech stocks have shown more robust signs of recovery. Also, after briefly earning a positive net income in 2021, Roku returned to losses and shows no signs of becoming profitable. Is it time to give up on Roku?
The state of Roku
Even Roku's detractors cannot deny that the platform continues to grow in popularity. In the third quarter of 2023, active accounts reached 76 million, a 16% increase in one year. That led to 22% more streaming hours as users increased their time on the platform.
This growth occurred because the reach of Roku continues to increase. The Roku operating system is the No. 1 OS for TVs in the U.S., and nearly half of U.S. broadband users have a Roku account. Also, the popularity is not limited to the United States. Roku is also the best-selling OS in Mexico, and it continues to expand across Latin America and European markets such as the U.K. and Germany.
Roku's financials
Unfortunately, that success has not necessarily translated into a solid financial performance. In the first nine months of 2023, revenue of $2.5 billion rose by 11% from year-ago levels.
The fact that yearly revenue rose 20% in Q3 may indicate some degree of recovery. Nonetheless, other parts of its income statement point to further pain. A significant operating loss meant its overall net loss increased to $631 million during the first three quarters of 2023. Roku lost $261 million during the same time frame in 2022.
Why Roku has struggled
The income statement also shows rapidly rising operating expenses, which increased 31% in the first three quarters of the year. By looking more deeply at operating expenses, one can see where Roku spends heavily.
The aforementioned moves to increase its presence may partially explain the higher sales and marketing expenses. Moreover, Roku competes with companies such as Alphabet, Amazon, and Samsung in this space. Hence, the increased spending on research and development may be its attempt to compete with its peers.
Still, the stock shows some indications that investors may be losing patience with the company. Despite the rise in the stock price for most of 2023, Roku stock seemed to run out of steam in early December when it reached a 52-week high. Since that time, the stock price has dropped by about 25%.
That decline has taken its price-to-sales (P/S) ratio to 3.5, comparable to where it traded after its 2017 initial public offering when Roku's value proposition was not as widely understood. Such levels could point to a buying opportunity, but they also imply that investors are not buying into its strategy, which could bode poorly for the stock going forward.
Should investors stay bullish on Roku stock?
Given the state of Roku, it is probably premature to lose faith in the stock. Admittedly, the losses are disconcerting, especially considering the 20% revenue growth in Q3.
However, the high operating expenses are likely investments in the company that should pay off for Roku longer term. Moreover, the 22% yearly increase in streaming hours is a sign of the platform's growing popularity. This bodes well for Roku as the ad market continues to recover and should eventually translate into gains for the entertainment stock.
