Things aren't getting any better for streaming specialist Roku (ROKU -1.64%). After starting the year on a bad note, some hoped the company's first-quarter results might be the start of a turnaround. Not so, says the market, as investors still weren't convinced by Roku's latest quarterly updates. On the one hand, there are some things to like about Roku's prospects, but the bears also have some valid arguments. Let's consider one reason Roku's stock might be a buy and one reason to stay away from the company.
Green flag: Engagement continues to deepen
One of Roku's biggest strengths is its ecosystem. The more viewers it can attract to its platform, the more attractive it becomes to advertisers and the more revenue it can generate. Thankfully, things are still moving in the right direction on that front for the streaming leader. In the first quarter, Roku's streaming accounts grew by 14% year over year to 81.6 million. Streaming hours jumped 23% year over year to 30.8 billion.
Roku streamed a staggering amount of media last year, more than 100 billion hours. If things keep up, it will easily surpass what it accomplished in 2023. With engagement rising in the first quarter, Roku's top and bottom lines also saw healthy growth. The company's revenue of $881.5 million was 19% higher than the year-ago period, while it reported a net loss per share of $0.35, much better than the loss per share of $1.38 recorded in the prior-year quarter.
Roku's strong results point to a continued rebound in the advertising market, which has struggled for some time, and a growing streaming industry. The soaring viewer engagement should boost Roku's ad-spot rates over time.
Red flag: Rising competition in the ad market
Though Roku is making progress, it might face an increasingly important challenge, with major streaming services now offering ad-supported tiers. That includes Netflix and Disney. Over the past two years, both streaming leaders introduced cheaper streaming options for price-sensitive customers while raising the prices of their ad-free subscription options. The cheaper, ad-supported versions of these streaming services pose a challenge to Roku's business.
Consider Netflix, a company synonymous with streaming. It boasts a large library of content and a highly successful production strategy. If it can attract enough customers with its lower-priced ad-supported streaming options, that will mean fewer advertising dollars going into streaming will go to Roku. The same goes for Disney+ and its library of iconic movies. Roku's management recognizes this risk and warned investors about it in its first quarter letter to shareholders.
Is Roku stock a buy?
Roku does face other challenges, including potential competition from Walmart, which is in the process of acquiring TV manufacturer Vizio. Some investors saw this move as an attempt to compete with Roku. Further, the company's average revenue per user hasn't been impressive of late. In the first quarter, it essentially remained flat at $40.65.
Still, the company has remained the leader in the connected TV market despite competition from several big players, including Amazon. Regarding the challenges from Netflix and Disney, customers still have to pay a fee to access these platforms' ad-supported tiers. That's unlike Roku's ad-supported ecosystem, which is completely free to the viewer. Importantly, there arguably remains a long runway for growth in the streaming industry.
In March, streaming accounted for 38.5% of television viewing hours, an increase from the 34.1% it grabbed in March 2023. The cord-cutting trend has been going on for a long time, but there is more work to be done, and that's in the U.S., one of the most penetrated streaming markets in the world. Even with competition in the advertising market from Netflix, Disney, and others, Roku can take advantage of this long-term opportunity thanks to its improving engagement and the network effect it is building.
In my view, the company's shares remain a buy, especially at current levels.
