Down 85% From Record Highs, Is Roku Stock a Buy In September 2022?
September 20 2022 - 3:14PM
Finscreener.org
Shares of streaming
company Roku (NASDAQ: ROKU)
have declined by an astonishing 85% from all-time highs. So, an
investment of $1,000 in Roku stock in July 2021 would be worth just
$115 today.
But the
ongoing pullback
allows investors to purchase a
growth stock at a discount. So, letU+02019s see if Roku stock can
make a comeback right now.
The bull case for Roku stock
The most popular streaming
platform in North America, Roku, is valued at a market cap of $10
billion. It accounts for 31% of the global streaming time in Q2 of
2022, followed by Amazon’s (NASDAQ:
AMZN) Fire TV at 16%.
Roku’s users streamed 20.7
billion hours of content in Q2, an increase of 19% year-over-year.
In the June quarter, its streaming hours per active account per day
was 3.7 hours, compared to 7.5 hours of legacy pay-TV per day
consumed by the average household in the U.S. Roku expects there is
enough room to grow its engagement and close this gap over
time.
Roku has successfully monetized
its user base via digital advertising. Basically, Roku sells ad
inventory from its ad-supported streaming service called the Roku
Channel. It also charges a fee from enterprises to use OneView, a
proprietary ad buying platform. The streaming giant also takes a
portion of subscription payments for those who subscribe to a
particular streaming channel, such as Amazon Prime
Video.
So, it is well poised to benefit
from the cord-cutting phenomenon and the secular shift towards
streaming services at the global level.
Roku has managed to increase its
revenue from $742 million in 2018 to $2.76 billion in 2021,
indicating annual growth rates of 55% in this period. It has enough
room to keep driving the top-line higher as ad spending in the
connected TV segment in the U.S. is forecast to touch $39 billion
by 2026. Further, total TV ad spending will surpass $100 billion by
2026.
Roku generates a majority of its
sales from the U.S. and is now expanding its ad business to other
geographies such as Canada and Mexico.
In Q2, The Roku Channel was among
the top five streaming channels in the U.S. by active account reach
as well as streaming hours engagement. It has a portfolio of over
300 free channels across categories such as news, sports, music,
and entertainment.
As viewership continues to shift
towards
streaming, users should
seek easy access to content. So, Roku partnered with NBCUniversal
to launch local news channels on the Roku Channel in major U.S.
markets.
The bear case for Roku stock
Similar to other growth stocks,
Roku investors have also endured a difficult time in 2022. The
double whammy of rising interest rates and red hot inflation
numbers is expected to lower consumer spending and corporate
earnings until the end of 2023.
Several companies will also lower
advertisement budgets to reduce their cost structure and offset the
softness in consumer spending.
While Roku improved its operating
income to $235 million in 2021, compared to an operating loss of
$13.3 million in 2018, it has reported a loss of $134 million in
the first six months of 2022. Analysts also expect the company to
report a loss per share of $3.28 in 2022 and $2.73 in 2023,
compared to adjusted earnings of $1.71 per share in
2021.
Despite the near-term headwinds,
I believe Roku stock price should outpace the broader markets in
the upcoming decade.
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