1 Incredible Stock Growth on 85% Decline You’ll Regret Not Buying on the Decline

The COVID-19 pandemic accelerated several major trends that had already taken shape in the late 2010s. One of these was a shift to streaming video over linear TV, as nearly every major media company launched a new streaming service and had a captive audience to sell to. One of the biggest beneficiaries of the pandemic period was Roku (ROKU -0.98%)which operates the world’s largest connected TV platform.

Roku’s stock price tripled in value in the six months from mid-August 2020 to mid-February 2021. The stock hit an all-time high in late July of that year. But shares fell sharply through the end of the year and throughout 2022.

After a strong comeback in 2023, Roku stock looked poised to continue its momentum into 2024. But the market had different ideas. The stock is currently down about 25% year-to-date and more than 85% from its all-time high.

But now it could be a great opportunity for investors. Roku is showing strong operating results and its potential is great, especially if you take a long-term view. The ailments of recent years seem to be largely behind her.

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The highest frequency on Roku’s results

Roku had strong results in 2020 and 2021 as media companies launched their own streaming services. As the largest streaming platform in the United States (and many other countries), Roku has had a big influence on media companies looking to reach a large audience. As a result, it has been able to extract favorable terms for revenue sharing, ad inventory sharing and ad purchases on its platform.

Moreover, increased competition among streaming services has led to higher ad prices for some of the most important ad inventory. The platform’s revenue, which includes advertising and revenue sharing, grew by 80% in 2021.

Then the Federal Reserve started raising interest rates, investors put pressure on media companies to make streaming profitable, and the industry saw further consolidation.

The competition and ad sales that drove Roku’s incredible success in 2020 and 2021 have dried up, leading to a massive hangover in 2022. Additionally, high inflation and a shaky economy have led to an overall decline in ad spending, diminishing and more Roku results. .

The platform’s revenue grew by just 20% that year and fell by 1% in the first quarter of 2023. Gross margin also declined every quarter.

Media and entertainment (M&E) advertising spend remains a drag on Roku’s bottom line today. But there are signs that the worst is now behind him.

The future looks bright

Despite the setbacks, Roku is still growing its platform revenue at a good pace. During the second quarter, the platform’s sales increased by 11%. Management expects 9% year-over-year growth for this segment in the third quarter.

More importantly, the gross margin is recovering from the low level of the third quarter of 2023. The gross margin of the platform was 53.4% ​​in the last quarter, and the guidance of the management suggests a similar gross margin for the next quarter.

In the fourth quarter, management expects platform revenue to accelerate and should also produce seasonally strong gross margin. Management is also confident that platform revenue will accelerate in 2025 as demand recovers and the company expands its ad inventory.

Roku’s user base figures look fantastic. It added 2 million new net users during the quarter and also saw engagement grow. The average Roku household watches four hours of content on its platform each day, up from 3.8 hours a year ago. Roku accounts for 47% of US streaming time on connected TVs, according to data from Comscore.

That’s a huge engaged audience for advertisers, and they’ve noticed. If you strip out M&E ad spending, Roku saw ad revenue grow faster than the overall ad market and the streaming video ad market last quarter in the US. Investors should expect this trend to continue, more than offsetting M&E weakness.

The distant future looks even brighter

The investment thesis for Roku, as CEO Anthony Wood constantly points out, is that all media will eventually move to streaming. If that happens, Roku, with its substantial share of connected TV streaming hours, will benefit greatly.

As mentioned earlier, the shift to streaming has intensified in 2020 and 2021 as media companies rushed to launch their streaming services and threw a lot of money at them, in part through advertising on the Roku platform. The dust is starting to settle from that frenzy, and media companies are now having to justify their spending. But the long-term trend remains intact.

In fact, we’ve seen more and more deals between media companies to push users to stream. The next frontier is sports entertainment. Disney, Foxand The discovery of Warner Bros plans to launch a streaming joint venture called Venu for their sports offerings. Amazon I just bought the rights to some NBA games.

And really Netflix is getting into sports streaming with an NFL deal. Sports could be a huge opportunity for Roku, as media companies could spend to drive viewers to their real-time properties, and Roku could use its position to take some of the ad inventory from streams.

While Roku has had a rough time, it looks poised for a return to form, and the long-term thesis remains intact. At the current share price, it looks like a real bargain for an industry-leading business with excellent growth prospects.