There are no two ways about it -- Roku (ROKU -4.59%) stock has been tough to own for a while now. Although the company's past two reported quarters both had their bright spots, shares are down more than 40% over the past six months thanks to investor disappointment tied to those results.
Walmart's February announcement that it wants to acquire Roku's connected-TV rival Vizio didn't help any either. It implies that the retailer wants to dive deeper into the streaming business for itself. With this recent weakness, Roku stock now sits 88% below its pandemic-prompted high in 2021.
As the old adage goes, though, the pendulum swings both ways. In the same way that the market turned too bullish on this ticker in 2021, the bears are arguably overreacting to what's recently been billed as bad news. Investors who are willing to take a step back and look at the bigger picture should see that the sellers overshot their target when it comes to Roku stock.
No shortage of troubling data
You know the company. Roku is, of course, North America's most prolific connected television brand. It controls a little more than half of this market, according to market research outfit Pixalate. The company reports that 81.6 million households now regularly use at least one Roku device.
For perspective, Walt Disney says there are now 54 million Disney+ subscribers in the United States and Canada, while Leichtmann Research reports that 71 million U.S. households still pay for cable TV. The COVID-19 pandemic was clearly a boon for Roku's reach, with lots of people finding the time and reason then to rethink how they buy and view their video entertainment.
Curiously, though, the wind-down of the coronavirus contagion hasn't slowed the company's user growth. Ditto for the amount of streaming video its devices deliver to these folks.
Data source: Roku Inc. Chart by author.
So what's wrong? Investors were more than a little rattled by the fourth quarter's marked slowdown in the company's average revenue per user, or ARPU. Then Roku's management rattled shareholders further by pointing out within Q1's report that the company still faces "difficult year-over-year growth rate comparisons within streaming service distribution activities." CEO Anthony Wood adds: "This headwind is due to past price increases and a higher mix shift toward ad-supported offerings."
Translation: The foreseeable future may not be as impressive as the recent past has been.
Except, all of this bad news may already be priced into Roku stock ... and then some.
It's all (finally) coming together
Don't misread the message. Owning a piece of this company still poses an above-average risk. Even if it's not yet reached its maximum number of total users, its per-user revenue ceiling may well be in view (if it's not already met). The company's profitable, but remaining competitive in this business isn't cheap. More than a few analysts fear Roku may not be able to meet its future free cash flow goals, even though it's now regularly reporting positive EBITDA.
Not every analyst is wildly concerned, though. Wedbush's Michael Pachter writes: "We believe Roku has found religion in generating and expanding positive EBITDA and will not revert to excessive spending for long-term growth. Instead, Roku has refocused on balancing new initiatives that result in near term return on investment (ROI) with expanding free cash flow and tracking toward positive net income."
In other words, Pachter believes there's good reason to expect Roku to remain in the black. And he doesn't appear to be wrong.
See, Roku has figured out how to do more with less. Last quarter's revenue was up 19% year over year despite spending less on research and development, administrative costs, and (most notably) sales and marketing. The company's Q1 marketing spending was down more than 13%. Roku's newly achieved sheer scale likely has at least a little something to do with that.
Data source: Roku Inc. Chart by author.
Roku is also well-positioned to benefit from advertising's ongoing shift away from conventional cable TV and toward streaming. In fact, the Interactive Advertising Bureau believes 2024 will be the first year advertisers spend more on streaming ads within the United States than they will on linear cable television commercials ... nearly $63 billion versus $58 billion, respectively. That's a 16% improvement over 2023's connected TV advertising tally, accelerating from 2023's growth pace of 15%. It matters simply because 85% of Roku's first-quarter top line and all of its gross profits come from its advertising business.
At the same time, the entire advertising industry is projected to bounce back from its recent spending lull. Digital ads are expected to lead the way. Market research outfit eMarketer believes the United States digital ad market is set to grow on the order of 11% this year and then repeat the feat next year. That bodes well for Roku too.
Risk-tolerant growth investors can take a swing on Roku stock
Roku is still not a great pick for everyone. Profit margins remain thin, and aren't guaranteed to persist. And if nothing else, the volatility that awaits could be downright sea-sickening. Decide carefully whether or not you really want in.
Don't sweat the stock's recent weakness too much, though. This company's never been more promising than it is right now, yet Roku stock's nearly as cheap as it's been in years.
This might help: The analyst community's current consensus price target of $76.23 is 34% above the stock's present price.
