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Share prices of Roku (ROKU -1.65%) fell hard last year as investors grew concerned about slowing growth in revenue and mounting losses on the company’s bottom line. Despite another weak earnings report for the fourth quarter, however, Roku is starting to show signs that it is turning the corner, including positive trends taking shape with sales of Roku TVs.
Investors are certainly taking notice of a potential turnaround in the near term, with one former bear on Wall Street recently upgrading the stock to a buy. The stock has rebounded 67% year to date, although it is still down 85% from its all-time high. With catalysts starting to emerge for a turnaround in growth, the stock has more room to run.
Two problems for Roku have been supply shortages of TVs and higher TV prices, and tightening spending by advertisers. While Roku generates the bulk of its revenue from advertising, it still relies on a healthy TV market and sales of Roku player devices to get users to sign up on its platform. Platform revenue, including ads, grew just 5% year over year in the fourth quarter, while devices revenue fell 18% over the year-ago quarter. These are much weaker numbers than the double-digit rate of growth investors were used to seeing a few years ago.
But there was good news that could signal the worst is over. Management reported that U.S. smart TV sales were better than expected last quarter as TV prices started to come down from their previous highs caused by supply shortages.
Higher TV prices have pressured sales of Roku-powered TVs, where it licenses its operating system to TV manufacturing partners. If TV prices continue to come down, that could stabilize Roku’s devices revenue and go a long way to reversing the revenue deceleration in recent quarters.
Moreover, Roku TV gained market share in the quarter. The company said it held 38% share of smart TV units sold in the U.S., which was more than the next two TV operating systems combined. Roku was also No. 1 in Canada and Mexico, where it held 30% of units sold.
Roku’s leading operating system, its exclusive content on The Roku Channel, and the affordability of its smart TVs should continue to grow its active accounts much higher from the 70 million it ended 2022 with. There are an estimated 1 billion broadband households worldwide, so Roku could grow its accounts much higher.
Roku is going to emerge from this downturn in a stronger position to win more advertising revenue. Partnerships with affordable TV brands like Philips, Sharp, and TCL are a major advantage in growing its active accounts, and therefore winning a greater share of advertising spending in the connected TV market.
There’s been concern about increasing competition from big tech giants, most notably Alphabet‘s YouTube, which is trying to get its piece of the billions in advertising shifting to digital media platforms. But investors are overlooking Roku’s strategy to form partnerships with many different brands as a key competitive advantage in growing its base of users, and therefore building its clout with advertisers.
Roku’s partnerships are a testament to its large base of active accounts. Other companies know that Roku has an attractive brand and value proposition in entertainment, which is valuable in growing their own business.
Considering management’s guidance to reach positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2024, along with the prospects of a growing installed base of accounts, one analyst sees a brighter road ahead for the streaming platform.
Bank of America analyst Ruplu Bhattacharya recently upgraded the stock from an underperform rating to a buy with an $85 near-term price target, representing 25% upside from the current quote. One of the reasons cited by the analyst was Roku’s outperformance in the advertising market, with management’s first-quarter guidance coming in ahead of expectations despite a weak ad environment.
Roku stock currently trades at 3 times its trailing-12-month sales, which is a big discount to its previous trading history of around 10 on a price-to-sales basis. Once the ad market is in full recovery, and revenue is growing at faster rates, the stock could head much higher than the analyst’s target over the next few years.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Bank of America, and Roku. The Motley Fool has a disclosure policy.
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