Roku, Inc. (NASDAQ: ROKU) is a leading streaming platform that allows users to access various entertainment options on their TVs. The company has become very popular recently as cord-cutting accelerates and consumers shift to streaming services. But after surging early in the pandemic, Roku stock has cratered, falling over 80% from its highs.
So is Roku stock a good investment today? Or is the streaming pioneer headed for further declines? Let’s dive deeply into Roku and analyze the bull and bear cases for the stock.
An Overview of Roku’s Business Model
Roku primarily makes money in two ways:
Player Revenue
Roku sells video streaming devices allowing users to access the platform and stream content on their TVs. This includes Roku media players like the Roku Express, Streaming Stick, and Roku Ultra. Player revenue also includes licensing fees from TV manufacturers that run the Roku operating system.
Platform Revenue
This includes ad revenue from the Roku home screen and ads during content playback. Roku also takes a cut from subscription revenue when users sign up for streaming services via the Roku platform.
In recent years, Roku has also expanded into original content and the bright home space. But the core business remains centered around providing a streaming platform and monetizing the Roku user base.
Why Roku Stock Surged Early On
Roku went public in 2017 at $14 per share. The stock soared in the years that followed, driven by:
- Cord-cutting acceleration – As pay-TV subscribers dropped cable in record numbers, Roku benefited from this secular trend towards streaming.
- Strong account growth – Roku’s active accounts jumped from 13.2 million in Q3 2017 to 56.4 million in Q3 2021.
- Increased streaming hours – Streaming hours on Roku skyrocketed from 3.8 billion hours in Q1 2018 to 18 billion in Q1 2021.
- Improved monetization – Roku’s average revenue per user consistently trended higher as its ad and platform businesses scaled up.
Roku’s first-mover advantage in the streaming device market allowed it to become the gateway to streaming services for millions of cord-cutters. This put Roku in an excellent position to capture ad revenue as streaming went mainstream.
The stock price reflected this leadership position, surging over 900% from the 2017 IPO price to an all-time high of $486 in July 2021.
Why Roku Stock Crashed
After peaking near $500 in mid-2021, Roku stock has plunged over 80%, trading around $80 at the time of this writing. What drove this epic decline? A confluence of factors:
Lower Expected Growth
Roku’s early pandemic growth spurt fueled investor expectations that were too optimistic. When user and revenue growth began normalizing in 2021, investors fled the stock as future expectations were reset lower.
Supply Chain Issues
Like many hardware companies, Roku has battled component shortages and supply chain problems over the past year. This has negatively impacted Roku’s ability to capitalize on streaming demand fully.
Post-Pandemic Slowdown
Roku saw a pull-forward in demand during COVID-19 lockdowns as bored consumers streamed more content. Engagement has moderated in a post-pandemic world as consumers have more options for their free time once again.
Competition
Roku faces increasing competition from giants like Apple, Amazon, and Google, which all offer streaming devices. These rivals leverage streaming to complement their broader ecosystems.
Macroeconomic Headwinds
Advertising spending is highly sensitive to the economic cycle. With analysts projecting a potential recession, investors have dumped Roku stock, fearing that advertisers could slash ad budgets.
This confluence of headwinds reset investor expectations and lower valuations for Roku stock after the growth euphoria peaked in 2021.
Bull Case: Original Streaming Leader Has Room to Run
Despite Roku stock declining over 80%, the bull case is still compelling for several reasons:
Massive Secular Tailwinds
The cord-cutting megatrend that fueled Roku’s early growth is still in the early innings. Streaming still accounts for under 35% of TV viewing. Roku is well-positioned to capture more ad revenue as legacy TV continues declining.
Market Leader
Roku maintains a first-mover advantage with over 65 million active accounts. Roku TV models made up 1 in 3 smart TVs sold in the U.S. last quarter. Roku’s scale and brand recognition provide competitive advantages.
Path to Profitability
Roku has affirmed it expects to be profitable on an adjusted EBITDA basis in 2023. Improved ad targeting and raised CPMs should boost platform margins over time.
Reasonable Valuation
Roku trades at a lofty 5.5x price/sales ratio even after its crash. But this is far lower than the over 20x sales multiple reached in mid-2021. If Roku returns to growth, the stock could rebound.
Optionality in New Segments
Roku’s investments in content production and intelligent home devices give it options beyond streaming devices and advertising. These tangential growth drivers provide upside.
Bear Case: Growth Story Has Played Out
On the other hand, Roku bears would point to the following counterarguments:
Intensifying Competition
Deep-pocketed rivals like Apple, Amazon, and Google are prioritizing their streaming device businesses more than ever. Roku risks losing market share over time.
Post-Pandemic Engagement Decline
Streaming hours and user growth are slowing substantially now that consumers have more options for their time as pandemic restrictions fade. This headwind could persist.
Weakening Ad Market
The ad market is showing cracks as the likelihood of a recession increases. Roku generates most of its gross profit from advertising. An ad spending pullback would crush Roku’s margins.
Limited Differentiation
Roku’s devices and operating systems lack primary differentiation from cheaper alternatives. This could commoditize Roku’s hardware business over time.
Still Lofty Valuation
Even after the vast drawdown, Roku’s 5.5x price/sales multiple remains expensive for a company projected to increase revenue by 22% in 2023. More realistic valuations could mean more downside.
Conclusion: Wait for Further Clarity
Roku stock appears oversold at current levels, given the company’s leadership position in the secular streaming growth story. However, macroeconomic uncertainties and post-pandemic engagement declines create unanswered questions about Roku’s ability to return to solid growth in the next year.
Prudent investors may want to watch how Roku’s following few quarterly reports unfold before determining if the stock has bottomed. Roku must show it can boost account and streaming hour growth while maintaining solid revenue momentum in a weakening ad market.
Upside potential remains if Roku can strengthen its competitive moats and unlock margin expansion. But downside risk still lurks if competition weighs on market share or the ad market deteriorates further. Given the conflicting bull and bear arguments, sitting on the sidelines until Roku provides more clarity may be the wisest move.
FAQs
What is Roku’s stock symbol?
Roku trades on the NASDAQ under the ticker ROKU.
Does Roku pay a dividend?
No, Roku does not currently pay a dividend. The company is focused on reinvesting profits into growth.
Is Roku profitable?
Roku is currently unprofitable on a GAAP net income basis due to high operating expenses. However, Roku was profitable on an adjusted EBITDA basis for the first time in Q4 2021. Management expects to be good on an adjusted EBITDA basis for 2023.
Who are Roku’s main competitors?
Roku’s significant competitors include Amazon (Fire TV), Apple (Apple TV), Google (Chromecast), and innovative TV platforms like Samsung’s Tizen OS. Roku competes against these technology giants in the streaming device and platform space.
What is Roku’s most popular streaming device?
Roku’s Streaming Stick line is its most popular seller. The Roku Streaming Stick+ and Streaming Stick 4K provide a compact, affordable streaming solution. Roku Express HD and Roku Premiere are also popular low-cost options.
