The stock has had its ups and downs in the past year, but Roku's (ROKU +2.49%) trajectory has mainly been in just one direction lately. Shares are down a brutal 80% since setting their pandemic highs in early 2021 and have declined over 20% following the streaming video specialist's Q4 earnings update in early February. Industry peer Netflix (NFLX 0.10%), on the other hand, is beating the market in the past year, suggesting there are weaknesses in Roku's business approach or in its engagement trends.
Declines of that magnitude often reflect serious challenges for a company that's aiming to build sustainably positive earnings. But in some cases, a drop like that could lay the groundwork for a market-thumping rebound once the business recovers its past momentum. Does Roku fit more into the bearish or the bullish category? Let's take a closer look.
The case for selling
It's not hard to find reasons to feel pessimistic about this business right now. Roku's expansion trajectory is decelerating toward the single digits, for example, threatening its status as a growth stock. Revenue was up 11% in 2023 compared to the prior year's 13% increase and the 50%-plus gain in each of the previous three years.
Contrast that result with Netflix, which recently reported accelerating sales growth, and you can see why many on Wall Street believe Roku's best days are behind it.
NASDAQ: ROKU
Key Data Points
Roku also seems no closer to creating the type of profits that could eventually approach Netflix's results. The operating loss expanded to $792 million in 2023 from $530 million a year ago. Roku posted declines in its core average monthly revenue, too, due to weakness in the advertising industry, which is still responsible for most of its business.
Meanwhile, Netflix is also pushing into the ad market, but steady subscription fees make up the lion's share of revenue. That approach appears much more sustainable than Roku's.
The case for buying
You'll get a big discount for purchasing Roku's stock amid all the uncertainty about its earnings power right now. Shares are priced at less than 3 times annual revenue compared to Netflix's price-to-sales ratio of nearly 8.
That discount is available even though the business is succeeding on its most important metric: engagement. Roku's user base grew by 10 million in 2023 to reach 80 million. On average, these TV fans streamed 4.1 hours of content per day in Q4, up from 3.8 hours per day a year ago and 3.6 hours per day in late 2021.
That success is the direct result of Roku's growing content catalog, combined with steady improvements to its browsing and streaming video functions. Partnerships with advertisers like Shopify, meanwhile, promise to make the platform more valuable for ad giants.
Watch the stock instead
Yet, most investors will want to simply watch this stock until there's a clearer path toward sustainable earnings. Management says Roku is positioned to win more than its fair share of advertising dollars as this spending shifts away from traditional TV. There's a long runway for user growth ahead, too, both in core markets like the U.S. and in the international arena.
Keep an eye on monetization metrics like average revenue per user and operating profit margin for signs that Roku is finding a way to build a business out of its large and growing user base.
