Don’t Give Up on Roku Stock Just Yet

Despite its punishing decline over the past month, there is still hope for video streaming company Roku’s (NASDAQ:ROKU) stock.

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The California-based company that develops apps and other devices that facilitate access to streaming content. It also runs an advertising business that has been in the penalty box since its last quarterly earnings report when the company provided forward guidance for its sales in the current fourth quarter of $892 million. This is below Wall Street’s expectation for $944 million in sales. Analysts and investors completely disregarded the fact that Roku’s third-quarter revenue rose 51% from a year earlier and focused exclusively on the weaker-than-expected guidance. Consequently, ROKU stock has fallen 28% since Nov. 1 to now trade at $228.78 per share. 

Even worse, ROKU stock has fallen 38% in the past six months and is 53% below its 52-week high of $490.76. While the decline has been disappointing, there is reason for shareholders to hang on and wait for an eventual turnaround in this stock, which continues to have potential despite its recent troubles. 

Deal With Google

ROKU stock briefly moved higher recently after the company announced that it had reached an agreement with Google’s parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) to keep YouTube and YouTube TV (Google’s livestreaming service) on Roku’s streaming platform. The deal ensures that YouTube, which remains popular with younger consumers who are coveted by advertisers, will remain available on Roku’s 56.4 million active customer accounts. Their former deal would have expired on Dec. 9 if a new deal could not be reached.

While terms of the agreement were not disclosed, the deal avoids a YouTube blackout. That would have led to customer dissatisfaction and defections for Roku, especially since its main competitors, Amazon’s (NASDAQ:AMZN) Fire TV and Apple’s (NASDAQ:AAPL) Apple TV each provide YouTube to their customers. The deal with Alphabet to keep YouTube on its service follows similar deals that Roku reached with Comcast’s (NASDAQ:CMCSA) Peacock streaming service and AT&T’s (NYSE:T) HBO Max earlier this year. Roku continues to negotiate hard to keep premium, in demand content on its platform that it can sell advertising against.

Continued Growth for ROKU Stock

Like many companies — particularly in the technology space — Roku has struggled this past year with global supply constraints, labor shortages, and the looming prospect of higher interest rates. However, Roku’s growth is likely to continue in both the near-term and long-term. According to market research firm Technavio, the online streaming services market will grow to reach $191.72 billion in annual revenue by 2025, representing a compound annual growth rate (CAGR) of 18.74%. At the same time, the number of Americans paying for traditional cable television services is forecast to fall over the coming four years. 

And the U.S. is not the only market that Roku is focused on. The company is also pushing into foreign markets such as the United Kingdom, Germany, and Brazil; all of which are less mature than the American market and present big growth opportunities for Roku. Advertising is also likely to keep growing at a brisk rate and its profitability should increase over time.

Organizations are more and more looking to advertise directly to consumers through connected televisions and other devices. That’s right in Roku’s wheelhouse. It should be noted that the top 10 cable-TV advertisers doubled their advertising spend on Roku’s platform in this year’s third quarter, an encouraging sign.

Stick With ROKU Stock

While it continues to face some headwinds, Roku stock is far from a lost cause. The selloff that has occurred since the summer is starting to look overdone and there continue to be many reasons to remain positive on the company and the long-term prospects for its share price. As long as Roku continues to ink content deals, expand internationally and grow its advertising business, the share price gains should follow.

The supply chain issues and inflation concerns that Roku is grappling with have afflicted many other technology companies and are not unique to Roku. Over the next year, most of the current difficulties should ease. For these reasons, ROKU stock remains a buy (and hold).

On the date of publication, Joel Baglole held a long position in GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.  


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