Roku (ROKU -10.29%) reported revenue growth of 14% in the fourth quarter of 2023, which was better than Wall Street's consensus analyst estimate. But management also talked about a challenging industry environment, which explains why shares took a huge hit following the earnings announcement.
Although the streaming stock has soared 77% since the start of 2023, it remains 85% below its all-time high. However, investors who see this as a bargain opportunity should know three things about the business first.
1. The streaming ecosystem
Investors are undoubtedly familiar with the top streaming services out there, like Netflix, Walt Disney, and Amazon Prime Video, to name just a few. These companies spend billions of dollars to produce and license content, which they directly serve to viewers in a subscription format.
Roku's business model differs. It sells hardware products, representing 16% of revenue last quarter, that let viewers aggregate all of their streaming options in one place. This smart-TV operating system alone is valuable given the huge number of services on the market today. Consumers like the single, easy-to-use interface.
But Roku also operates a digital platform, which generated the remaining 84% of total sales in the fourth quarter. This segment makes money from advertising as well as revenue-sharing agreements as users sign up for services or purchase content directly through Roku.
At a high level, this company aims to be an agnostic platform that allows compatibility with any streaming service. Its key competitors are Apple TV, Alphabet's Chromecast, and the Amazon Fire Stick.
2. Its dominant market share
Despite competition from some deep-pocketed tech giants, Roku has the top market share in the smart-TV industry in the U.S., Canada, and Mexico.
It had 80 million total active accounts at the end of 2023, a figure that was up 14% year over year. Thanks to this leading position, Roku will continue to benefit from the ongoing cord-cutting trend. Consumers are drawn to the lower prices, greater choices, and added convenience of ditching their cable subscriptions.
More than half of all households in the U.S. have already ditched their traditional cable packages. With many major sports leagues already jumping into the streaming waters with live events, there's no reason to believe the cord-cutting trend won't continue.
This gives Roku a strong tailwind for the years ahead. Engagement on the company's platform keeps rising as consumers watched 106 billion hours of content in 2023, up from 87 billion in 2022. Eventually, more and more ad dollars will also make the transition to streaming, a shift that can propel Roku higher.
3. The financial discussion
Macroeconomic headwinds are still a top concern for executives, but that didn't prevent Roku from posting double-digit revenue growth in 2023. And in the current quarter, management expects sales to increase 15% year over year. This should give shareholders confidence that in a more robust market, growth for the company should pick up.
It's worth pointing out that besides posting net income of $242 million in 2021, the business has been consistently unprofitable. This shouldn't be surprising because Roku is still fully committed to investing aggressively in growth initiatives. CEO Anthony Wood thinks all TV will be streamed one day, so he's trying to capitalize on this opportunity.
To its credit, though, Roku generated positive free cash flow in 2023. "We plan to increase revenue and free cash flow and achieve profitability over time," the latest shareholder letter says. Add in the fact that Roku carries zero long-term debt on its balance sheet, and this is an encouraging sign for long-term shareholders.
Investors looking to take advantage of the fact Roku still sits far below its all-time high can now move forward with a better understanding of these core aspects of the business.
