Roku has shed nearly half of its value over the past six months, but there are reasons for optimism in a sea of pessimism.
It’s been a rough past few months for Roku (ROKU 0.40%) investors. The stock has fallen in five of the last six months, shedding nearly half of its value along the way.
Guidance calling for slowing top-line growth, the continuing lack of profitability, and concerns about a new competitor have soured the mood for analysts and investors alike. Momentum suggests that the downticks will continue, but we shouldn’t assume that it will be a June swoon. Let’s go over some of the reasons why Roku could bounce back this summer.
1. Streaming services keep growing more expensive
The popular narrative is that the streaming services industry is a cutthroat business, but check your bill to see that this isn’t a race to the bottom. The major premium players keep increasing prices for their ad-free offerings. Warner Bros. Discovery‘s Max became the latest platform to raise the bid on Tuesday. The offering formerly known as HBO Max now costs $16.99 a month, $1 higher than before and $2 higher than it was at the start of last year.
Losses on consumer-direct digital platforms have forced services to boost prices, but the operating climate is getting kinder. Netflix has been profitable for years, but Disney‘s namesake offering surprised investors with an operating profit in its latest quarter, and Disney+ should consistently be cash flow positive by the end of its fiscal fourth quarter that ends in September.
Roku investors should love this. It operates a free-to-use operating system for TVs. Its revenue comes largely from the platform revenue it generates, largely in revenue-sharing deals from ads and premium subscriptions. As more players start to stabilize financially — and don’t go telling me that the bidding war for the troubled Paramount Global (PARA -1.43%) won’t make it a stronger business — media giants should be willing to pay more to Roku to stand out with their profitable or near-profitable offerings.
Image source: Getty Images.
2. Roku is still growing
Roku is only gaining in popularity. It closed out its latest quarter with a record 81.6 million households on its streaming platform, 14% higher than it was a year earlier. Engagement is growing, with a 23% jump in time spent streaming over the past year outpacing the user growth.
There have been monetization concerns over the last two years as average revenue per user (ARPU) has deteriorated, but that was the handiwork of a soft ad market and Roku’s international expansion in markets that are earlier in the migration to connected TV advertising. ARPU has actually increased sequentially in two of the past three quarters.
The red ink is also starting to soften its hue. Roku has generated positive free cash flow and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the last three quarters. Roku did warn of challenges for the balance of the year, but it has routinely exceeded its historically conservative guidance. It will deliver its next quarterly report near the end of next month.
3. The Walmart threat remains overblown
It’s been four months since Walmart (WMT 0.40%) announced a $2.3 billion deal for smart TV manufacturer Vizio. Vizio’s SmartCast operating system is a fringe rival to Roku’s dominant offering, but the concern here is that Walmart will use its mass-market appeal to amplify SmartCast’s reach. Right now, SmartCast’s audience is a fourth of Roku’s user base, and it generates a fifth of its platform revenue.
Is this as problematic as the stock’s downticks suggest? I don’t think so.
For starters, antitrust regulators are taking a closer look at the proposed pairing. If it thinks that the country’s leading retailer can become a giant in smart TV operating systems, it could reject the deal. The more likely scenario is that the transaction does clear regulatory hurdles, because Roku has done just fine competing against some of the wealthiest names in consumer tech for years.
It all adds up for a potential breakout in the coming months for the leading streaming service stock. A healthier operating climate for premium streaming services, a depressed share price heading into next month’s financial update, and misguided concerns that a monster retailer that has struggled with digital content before will dent Roku set up the stock for a bounce-back summer.
Rick Munarriz has positions in Netflix, Roku, and Walt Disney. The Motley Fool has positions in and recommends Netflix, Roku, Walmart, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.