The past year has been a really rough time to be an investor in Roku (NASDAQ: ROKU), a leading streaming platform. Shares had already taken a massive beating over the past 12 months. And as if that wasn’t enough, the stock price plummeted another 25% after Roku’s second-quarter results thoroughly disappointed the market. While the shares have bounced back a bit in the past few days, they are still trading near their lowest price in two years.
It is quite understandable for any investor to contemplate selling their Roku shares at this time. There is no one-size-fits-all investing strategy. However, here’s the key question investors should ask before hitting that sell button: Are Roku’s poor second-quarter results driven by the company’s declining business fundamentals and an extinguishing future opportunity, or is the reality more nuanced? Let’s review.
Likely one of its worst quarters in the recent memory
Roku’s total revenue for the second quarter of 2022 grew only 18%, reaching $764 million. Growth in its platform revenue — which has been rising steadily and now makes up 88% of the total revenue — was also step down at 26%. Total and platform revenue saw notable deceleration from the first quarter of 2022, when they grew 28% and 39%, respectively.
The bottom-line numbers weren’t encouraging either. The company took a loss from operations of $110 million, compared to a relatively moderate loss of $23 million in the first quarter of 2022 and a gain of $69 million in the year-ago quarter.
The biggest blow came with Roku’s guidance for the third quarter of 2022: The company expects its year-over-year revenue to grow by a meager 3%, reaching $700 million. That number fell short of consensus analyst estimates by a whopping $200 million. And the company withdrew its full-year guidance — citing a high degree of uncertainty in the macroeconomic environment — not leaving much room for optimism for a quick turnaround.
Macroeconomic context offers greater clarity
While Roku’s headline numbers present a fairly clear picture of its recent quarter, they don’t really paint a complete picture of where the business stands today. Despite the continuing supply chain challenges — which have impacted TV sales for over a year — Roku added 1.2 million new subscribers in the quarter, taking the total to 63.1 million.
Viewers also continue to spend a good chunk of their time — on average, 3.7 hours per active account per day — streaming on their Roku devices. A total of 20.7 billion hours of content was streamed on Roku’s platform in the second quarter, fairly in line with the first quarter of 2022 and an increase of 19% over a year ago. Roku’s average revenue per user (ARPU) also surged a healthy 21% to $44.10.
Clearly, engagement is not an issue for Roku. Product or service quality don’t seem to be the culprits either — Roku continued to be ranked the No. 1 selling smart TV operating system in the US, and it grabbed the No. 2 spot in Mexico.
The big issue impacting Roku is the slowdown in the economy. Raging inflation and higher interest rates are squeezing consumers and putting pressure on businesses. As times get tough, advertising is one of the easy-to-cut material expenses for businesses. Many of Roku’s advertisers paused their ad spending in the middle of the second quarter, negatively impacting its revenue.
And Roku isn’t alone in facing this challenge. Even Meta Platforms, an established giant generating multiple times Roku’s revenue in advertising, and players like Snap and Twitter are experiencing the same ad cutbacks and revenue headwinds.
What should investors do?
Despite the impact of the slowing economy, the core thesis behind investing in Roku still seems to be intact. First, unlike many of its competitors that repurposed their cellphone or computer operating systems to stream content on TV, Roku purpose-built a software platform for TVs from the ground up, and the company believes its platform to be the best in the industry.
Second, the secular trends supporting Roku’s long-term opportunity are still in place: Consumers are steadily shifting away from traditional pay TV to streaming, with legacy pay-TV households expected to decline from 52.4% in 2022 to 42.4% in 2026. Also, the shift of advertising budgets from legacy pay TV to streaming is lagging the shift in viewers. In 2022, consumers spent 50% of their TV time on streaming, but marketers spent only 22% of their ad budgets on streaming.
Finally, Anthony Wood, Roku’s founder who has led the company for almost two decades, is still at the helm. Under Wood’s leadership, Roku has innovated and executed very well to attain a leading position in the industry.
That is not to say there are no risks to Roku’s business: Competition is intense, and Roku has to prove it can replicate its North American success in other parts of the world. It is also unclear when the economy will rebound and advertising spend will rise. Roku is not immune to macro headwinds. At the same time, it is fundamentally not a different business today from what it was about 12 months ago when shares were trading at an all-time-high price of over $475.
For long-term investors with diversified portfolios, the best strategy may be to hold onto their Roku shares and ride this bumpy ride as the company still has a long runway ahead. In fact, with pessimism at its peak — and considering the shares are trading at their five-year low price-to-sales ratio of around 3.5 — it may not be a bad idea to add a few shares of Roku.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Kaustubh Deshmukh (KD) has positions in Meta Platforms, Inc., Roku, and Twitter. The Motley Fool has positions in and recommends Meta Platforms, Inc., Roku, and Twitter. The Motley Fool has a disclosure policy.