Investors have thrown in the towel on Roku(NASDAQ: ROKU). The pandemic-era favorite is off close to 90% from all-time highs as Wall Street continues to worry about profitability and its competitive positioning in the streaming TV (CTV) sector. Even though nobody is talking about this stock anymore, the CTV platform is growing market share in the United States and around the world. It just reported strong growth yet again in the first quarter of 2024, but shares are selling off and down 34% year to date (YTD), potentially creating a buying opportunity for patient investors.
Here are two reasons to buy Roku stock, and one reason to sell.
1. Leading in streaming TV
Roku is the leading CTV platform in the United States and Mexico. Last quarter, there were 81.6 million Roku streaming households around the globe. Compared to a competitor like Comcast with 13.6 million video customers in the United States, Roku has gained considerable scale for its CTV platform in the last decade. Its users are moving in the right direction, too. Streaming households grew 14% year-over-year last quarter and have been growing at a double-digit rate for many years now. Competitors like Comcast are losing video customers, likely to people who are switching to CTV services such as Roku.
These customers are highly active on their Roku devices. Total streaming hours were 30.8 billion in Q1 2024, growing 23% year over year for the period. This shows that once Roku activates a customer, they spend more time watching on their Roku device each quarter. Roku's business model is to sell Roku TVs and streaming sticks at dirt cheap prices and then make money on customers through advertising. The first step to building an advertising business is getting customer engagement, which Roku has shown it can do time and time again.
As more households switch to CTV in the coming years, expect Roku's streaming hours to continue climbing higher as well.
2. Growing advertising revenue
Another reason to buy Roku is the success it has had in building this advertising business. Last quarter, Roku's platform revenue -- which encompasses its higher-margin ad sales -- grew revenue 19% year over year to $755 million. In Q1 2018, Roku's platform revenue was just $75 million. This means that in a little over five years, Roku has grown its advertising business by 10 times. Not too shabby.
How has it done this? A big reason is its advertising-supported streaming service called the Roku Channel. Roku users can access the Roku Channel for free and play a host of advertising-supported video content, from old movies to TV shows to some of Roku's own content. This app is now the No. 3 application on the Roku platform and is seeing streaming hours grow by 66% year over year, outpacing the overall platform usage. This vertical integration will help Roku get more advertising dollars to switch to Roku from legacy and competing services.
ROKU Operating Income (TTM) data by YCharts
Reason to sell: No profits
Roku keeps growing its advertising revenue. So why is the stock down? It's simple: The company cannot seem to generate a profit. Over the last 12 months, Roku has posted an operating loss of $652 million on $3.6 billion in revenue. That is an operating margin of negative 18%. The numbers have looked better in recent quarters, with a $72 million operating loss last quarter, but it is still negative and destroying shareholder value.
These losses are coming even after cost cuts and employee layoffs. Research and marketing expenses were both down year over year in Q1 2024, but Roku still couldn't seem to post a profit. An inability to generate a profit should be highly distressing for shareholders. Yes, Roku is still investing to grow, which might be a good thing over the long run. But at $3.6 billion in revenue, this is not a subscale business anymore.
Eventually, the leading CTV platform (with close to 100 million users) will need to generate a profit. If it can't, the stock will only continue to head lower.
Should you invest $1,000 in Roku right now?
Before you buy stock in Roku, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Roku wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $544,015!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of May 6, 2024
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.
