Should Investors Stream Into Roku Stock?

The glory days appear to be over for Roku (NASDAQ: ROKU) shareholders. After the digital media device maker’s stock price twice climb to nearly $500, it’s been a horror show on the way down. Last week Roku fell to a fresh 52-week low and more than 60% from its July 2021 peak.

While some have dismissed Roku as a one hit pandemic wonder, others think the fall from grace is an Oscar-winning buy opportunity. Earlier this month, Atlantic Equities gave Roku a sell rating and $136 price target citing market share losses in Europe and the potential for slowing growth by 2025. This week, the analyst at KeyBanc conceded a likely slowdown in new accounts but favored Roku’s long-term outlook in maintaining an overweight rating (but cutting his price target to $325).

What’s more certain is that Roku will remain a volatile play on the streaming TV theme. The curtain is closing but the show may not be over. Given the growth opportunities in the global streaming TV market, investors may want to rush back for the second act.

What Has Gone Wrong for Roku?

When a company hits it out of the park with its growth numbers, it can be both a blessing and a curse. For Roku, the blessing has turned into a curse because the red-hot growth of 2020 is expected to be lukewarm growth in 2022. Last quarter’s 51% top line growth fell shy of the Street magnifying recent concerns that the heyday is over. And after a huge swing to profitability this year, analysts are projecting only single digit EPS growth this year.

The active accounts base is another closely watched metric with Roku. Rising demand for Roku streaming devices and Roku-embedded TVs drove a 23% increase in active accounts in the third quarter but this too is likely to slow. Global supply chain constraints are expected to impact TV manufacturing volumes and the availability of Roku products in the marketplace.

Roku is also facing concerns about international growth. It has been spending handsomely to expand overseas but has struggled to establish a strong foothold. Market share gains in Latin America and other smaller markets have been overshadowed by market share losses in Europe. And with the U.S. streaming market quickly nearing saturation, international growth will be a key development.

Of course, much of Roku’s troubles are rooted in the intensely competitive nature of streaming TV. Amazon, Apple, Google, and a host of smaller players pose a major threat to Roku’s financial results. Complicating the matter is that Roku will need to dump more money into marketing to maintain competitiveness.

What Can Go Right for Roku?

Fortunately, there is a light at the end of the tunnel for Roku. While supply chain constraints and competitive pressures will persist, it does not have a serious demand problem. In fact, Roku has become somewhat of a household name when consumers are considering their digital media options.

What’s also in Roku’s favor is that consumers generally prefer all-in-one streaming TVs to stick alternatives such as Amazon’s Fire TV Stick. So, when TV manufacturing volumes normalize, this preference should lead to better performances at Roku.

Much of the focus is on Roku device sales, but these are just a gateway to the company’s main revenue sources which are subscriptions and advertising. While Roku player sales fell 26% in Q3, platform-related revenues soared 82%. And since Roku is the top player in ad-supporting streaming market, it will remain a go-to for advertisers across many industries for some time.

Another reason to feel optimistic about Roku’s ability to derive strong growth from the global cord cutting revolution is its sturdy financials. It sits on over $2 billion in cash compared to less than $100 million in debt. This should afford it ample flexibility to pursue growth opportunities whether it be content or overseas expansion.

Is Roku Stock a Buy?

Although there is the possibility that the minority contrarians prove correct, its hard to go against the bullish masses when it comes to Roku’s investment merits. Only a few sell-side firms call the stock a sell compared to more than two dozen buys. Given the sharp decline and the long-term growth prospects ahead, the downside appears limited and the upside substantial.

From a technical perspective, Roku’s charts aren’t pretty. The stock has continued to slide since a late-December ‘death cross’ and a convincing regain of the 50-day moving average is sorely needed to attract buyers. On the other hand, with the RSI reading attempting to curl up from a sub-30 level, there are signs of a possible early reversal.

Bottom line, Roku is looking more and more like a buy. Near-term disruptions may limit the upside over the next few months, but eventually the stock should start trending higher as the longer-term market opportunity is realized.