Roku's (ROKU 3.48%) stock hit an all-time high of $479.50 on July 26, 2021. At the time, the bulls were dazzled by the streaming device and software maker's explosive growth rates, and the buying frenzy in growth stocks amplified its gains.
Roku's revenue soared 58% in 2020 and 55% in 2021. That growth was mainly driven by the pandemic, which forced people to stay at home and watch more streaming video. That trend boosted its sales of streaming devices and ads across its Roku OS software platform, which runs on its own hardware and third-party devices.
Image source: Getty Images.
But in 2022, Roku's revenue only rose 13% to $3.1 billion as the pandemic's tailwinds were displaced by inflation's headwinds. Consumers purchased fewer streaming devices and consumed less content in a post-pandemic market, supply chain disruptions forced it to take losses on each device sold, and the macro headwinds forced companies to rein in their ad spending on Roku OS.
At the same time, it continued to ramp up its spending on original content for its Roku Channel and the production of first-party smart TVs. As a result, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned red with a loss of $84 million in 2022, compared to a profit of $465 million in 2021, and the bulls rushed for the exits.
That's why Roku's stock now trades at $74. However, these three green flags suggest that brighter days could be ahead.
1. Its audience is still expanding
Roku's growth is slowing down, but it's still gaining new viewers. In the first quarter of 2023, active accounts grew 17% year over year to 71.6 million, while its total streaming hours rose 20% to 25.1 billion. The Roku Channel's number of viewers also increased 25% to about 100 million at the end of 2022, which gives it a firm foothold in the crowded market for free ad-supported streaming video services.
Therefore, it's far too early for the bears to declare that Roku will be rendered obsolete by Amazon, Apple, and Alphabet's Google -- which are all selling cheap devices to tether more viewers to their subscription-based streaming video services.
2. Its expansion into Google's ecosystem
Roku generates most of its revenue and nearly all of its gross profits from its software platform. Therefore, it's more important for the company to expand the Roku OS and Roku Channel onto more third-party devices than it is to sell more of its own first-party streaming devices.
That's why it eventually launched its Roku Channel app on Samsung TVs and Amazon's Fire OS. But Google, which nearly pulled YouTube off Roku in late 2021 before an 11th-hour deal was struck, didn't seem eager to let Roku on board.
Therefore, it was a positive development when Roku finally launched its Roku Channel app on Google TV and other Android TV devices. Roku is still the top streaming OS in the United States, according to S&P Global, but it still ranks third behind Android TV and Samsung's Tizen TV in the global market. Hopping aboard Google's broad shoulders could help Roku reach more overseas viewers, reduce its dependence on the U.S. market, and expand its higher-margin platform business.
3. Its new partnership with Shopify
Roku and the e-commerce services company Shopify (NYSE: SHOP) both suffered tough post-pandemic slowdowns. However, a new partnership between the two companies might generate some unexpected tailwinds and synergies.
This new deal will allow Shopify to post shoppable ads across Roku's platform. Roku's users can click on the ads to learn more about products, complete the entire purchase directly through their TVs through Roku Pay, and return to watching streaming video after completing the transaction.
Roku claims this approach "shortens the advertising funnel from brand awareness to purchase on the largest screen in the home." It's unclear if these shoppable streaming ads will move the needle for either company right away, but they could certainly diversify and strengthen Roku's higher-margin advertising business over the long term.
But is it the right time to buy Roku stock?
These three green flags are encouraging, but they don't fully address the company's near-term challenges. Its stock isn't expensive at less than 4 times this year's sales, but I think it might still be smarter to bet on a more straightforward streaming play -- like Netflix -- instead of waiting for Roku's complex mix of hardware, software, and ads to grow again.
