Title: Can This Struggling Growth Stock Make a Comeback?
Streaming giants encountered a bump in the road a few years back as the boom in subscriptions brought about by the pandemic came to a halt. Companies like Netflix have bounced back, while others, such as Roku (-4.59%), are still grappling with the aftermath. Roku's shares have plummeted by a staggering 70% over the past three years.
However, this substantial drop could potentially serve as a blessing in disguise for some savvy investors. If Roku can manage to stage a comeback and climb back to its record-breaking heights, individuals who take the plunge today may reap substantial returns. But does Roku have what it takes?
The optimistic view of Roku
Although Roku's financials may not paint an entirely rosy picture, they're not all doom and gloom. In the third quarter, the company's revenue surged by 16% year over year, reaching $1.062 billion. Key performance indicators also saw a positive trend. Viewing hours rose by 20% year over year to a staggering 32 billion. Streaming households rose to 85.5 million, marking a 13% increase compared to the previous year. Investors may be concerned about Roku's average revenue per user (ARPU), which remained flat at about $41.10 for the period.
The red ink on Roku's balance sheet persists, with a net loss per share of $0.06 in the third quarter, an improvement from the loss per share of $2.33 recorded in the previous year's quarter. As long as Roku continues to expand its ecosystem, it should continue to attract advertisers, harnessing the power of the network effect. Furthermore, Roku's flat ARPU can be attributed to its expansion in international markets, where its monetization efforts are still in their infancy.
This detail underscores another important factor. The global streaming market presents vast opportunities. The United States, for instance, stands as the most advanced market globally, with a subscription penetration rate (30% above the global average). However, even in the U.S., streaming accounted for just 40.5% of total television viewing time in October.
Streaming's meteoric rise is far from over, providing ample room for growth in terms of both users and viewing time. Whichever streaming service emerges victorious, Roku is well-positioned to benefit from the industry's prominence. Lastly, Roku remains financially unstable due to its practice of selling its devices at a loss, with the platform segment that records advertising and related revenue sources generating a profit on an operating basis.
Roku's decision to sell its devices at a loss is a calculated gamble, with the company aiming to grow its ecosystem—and, by extension, its advertising revenue—to the point where device sales become immaterial. Given Roku's strong industry position and the vast, uncharted territory in streaming, this strategy could prove lucrative in the long run.
The verdict
Roku faces significant challenges and opportunities in the crowded streaming market. On the one hand, it faces stiff competition from industry giants like Amazon, which can afford to absorb losses in their CTV businesses as they build their audiences. On the other hand, Roku remained the dominant player in the North American CTV market in the third quarter, despite a decrease in market share. Its financial results showed steady growth, with revenue, streaming households, and viewing hours all trending upwards.
Monetization in international markets is lagging, but Roku's opportunities to bounce back remain intact. Additionally, economic issues, including the ongoing dip in ad spending, have played a role in its struggles. However, as Roku climbs out of this slump, monetizes its international market, and continues to make headway in the vast openings available in the streaming industry, the company could offer strong returns to patient investors.
In the context of potential investments, the substantial drop in Roku's shares could present an opportunity for some financially astute investors. If Roku manages to turn its fortunes around and reclaim its previous highs, these investors could stand to gain substantial returns.
Despite facing challenges such as stiff competition and lagging monetization in international markets, Roku's strong industry position and the vast opportunities in the global streaming market could make it an attractive investment prospect for patient investors.
