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The worst might be over for Roku (ROKU 8.58%). In mid-February, the streaming video specialist announced surprisingly strong sales growth while projecting an imminent return to adjusted profitability.
The company is still facing big challenges, though, including weak advertising spending and pricing pressures on its hardware sales. Against that mixed backdrop, let’s look at whether the stock is a screaming buy given its sharp decline over the past year.
The big worry heading into Roku’s fourth-quarter earnings report was that the digital-TV advertising market would continue its downward trajectory. In the third quarter, the industry fell 38% compared to a 17% drop in the prior quarter. Without at least a stabilization here, there was little reason to project a return to fast sales growth in the next several quarters.
But the fourth-quarter announcement eased those concerns. Roku beat management’s early November forecast that called for a modest drop in its core platform revenue. The streaming service grew at a 5% rate instead.
Sure, that result represented a sharp slowdown from the 20% rate that the company achieved for the full 2022 year. But the ad market might be stabilizing rather than continuing its pullback.
While there’s growing evidence of strengthening sales trends, the profit picture is muddier. Roku booked a painful $531 million operating loss in 2022 compared with a $235 million gain a year earlier.
Management also projected continued pressure on its earnings in 2023. Executives are busy cutting costs but don’t forecast breaking into adjusted profitability until the 2024 fiscal year. The company is still busy investing in growth initiatives, after all, like its original series, its advertising service platform, and improvements to the streaming experience.
The good news is that these efforts are clearly helping. Roku added 10 million active accounts to its rolls in 2022, surpassing 70 million users around the world. Streaming hours jumped by 14.3 billion to top 87.4 billion. Average revenue per user, a core monetization metric, rose 2% despite the sharp drop in advertising demand.
Roku’s positive engagement and its growing scale both suggest that management is right in saying that the company is likely to see reaccelerating sales growth over the next several years as the ad industry rebounds and as more TV watching shifts to streaming.
But there are two equally big issues that might convince investors to wait on buying the stock. The first is Roku’s focused business model that relies too much on advertising revenue, which can be volatile. The second is the company’s significant net losses, which appear set to extend into a second straight year in 2023.
If you don’t mind volatility and elevated risk, you can look past that short-term profit pressure and buy the stock now on the expectation that management will make the needed changes to its cost profile and operating model.
But most investors would want to watch this stock until more-concrete signs show up suggesting that Roku can generate sustainable profits even during less bullish times in the advertising industry.
Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.
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