The bear market has wreaked havoc on tech stocks over the past year, as investors have scrambled for safety to ride out the economic storm. This was further exacerbated by 40-year high inflation, rising interest rates and questions about how long the recession will last. Consequently, the Nasdaq Composite got it on the chin, crumbling 30% in the last year.
As painful as this period is, this dark cloud has a silver lining: even as paper losses mount, the ongoing sell-off has led to some notable opportunities for investors. Perhaps one of the best examples of this is Roku (ROKU 1.30%). The company, which boasts the world’s most used streaming platform, saw its share price fall 77%, despite a strong growth story and an industry-leading position.
Can Roku weather the gale-force economic headwinds hitting its stock in 2022? Let’s take a step back and look at the big picture.
Where will the audience come from?
The ongoing narrative lately has been that the best growth in streaming video is over. Streaming is falling out of favor, as current economic conditions have robbed Roku of its growth opportunities, but let’s examine the evidence.
The secular decline of cable TV continues as cable cutting continues to accelerate. The major pay-TV services lost about 4.6 million subscribers in the first nine months of 2022 and are on track to surpass the record losses they suffered in 2020, according to data provided by the Leichtman Research Group. Logic suggests that all of these former cable subscribers are turning to video streaming for their home entertainment needs.
What fatigue streaming?
Opponents suggest that viewers have begun to tire of streaming video and paid services, a phenomenon described as “streaming fatigue”. The story also goes that viewers had their fill of streaming video at the height of the pandemic and the growth of the industry ended, but the data suggests otherwise.
Streaming video consumption grew 35.1% year over year in October and now accounts for 37.3% of TV viewing, according to data compiled by Nielsen. Broadcast TV dropped 6.2% year over year, while cable TV viewership fell 8.6%. Additionally, all of the major streaming services have continued to grow market share, albeit at a slower pace.
Numbers don’t lie
Not many companies can say they collided Amazonia and won, but Roku counts among those select few. Roku is the most popular streaming device in the world, with a 23% share of all devices globally, according to Conviva. For context, Amazon’s Fire TV came in a distant second with just 12%.
Roku also has twice as many apps/streaming channels available on its platform as Amazon, with more than 33,000 apps in its app store, according to 42matters, a mobile and connected TV app intelligence firm. Compare that to under 17,000 for the Fire TV and the advantage is clear.
Roku’s secret weapon
Roku has a secret weapon that has helped it become the world’s audience leader. Roku built its operating system (OS) from scratch and licensed it to connected TV manufacturers who aren’t looking to reinvent the wheel. This gives Roku a captive audience of viewers who want to access streaming services through its platform. Roku is the No. 1 smart TV operating system. 1 in the US, No. 2 in Mexico and is gaining significant share in a number of other countries around the world.
It is worth noting that supply chain issues have persisted, particularly for smart TVs and streaming devices imported from China. Roku’s account growth has slowed as a result, but is expected to pick up again once these backlogs are cleared.
Short-term headwinds, long-term opportunities
In times of economic upheaval, companies often cut back on marketing expenditures. Roku gets a 30% cut of all advertising on its platform, so the segment has taken a huge hit. That was evident in the company’s third-quarter financial report, as revenue grew just 12% year over year, weighed down by slower advertising growth and lower margins on its devices.
Its service-agnostic platform, which profits from both paid subscription and ad-supported channels, is set to get a boost from a number of new ad-supported channels, including those from Netflix And Disney+ — two of the most popular streaming services in the world.
The moment is now
Overall, the evidence shows that Roku is a well-positioned company to capitalize on the age-old trend away from broadcast and cable TV and toward streaming. This means that once the bear market goes back into hibernation, Roku stock should roar again.
Over the past year, the stock has absolutely taken punishment, losing 77%. That puts Roku squarely in basement territory, selling for just 2X next year’s sales – its lowest rating never.
That’s not to say the stock can’t fall further: History shows it certainly could. However, given the company’s history of growth and innovation and its position as an industry leader, investors would be wise to invest now, before Roku’s stock starts to rally.
John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, serves on the board of directors of The Motley Fool. Danny Vena has positions in Amazon, Netflix, Roku and Walt Disney. The Motley Fool has locations and recommends Amazon, Netflix, Roku, and Walt Disney. The Motley Fool recommends the following options: $145 January 2024 long calls on Walt Disney and $155 January 2024 short calls on Walt Disney. The Motley Fool has a disclosure policy.