Roku (NASDAQ:ROKU) seems to be in an enviable position. It operates the most popular streaming service in the United States. But as the world began to return to some semblance of normalcy, investors sold shares of this and other pandemic plays. Since hitting an all-time high of $490.76 in late July, ROKU stock is down nearly 50%. And that includes today’s 18% pop in shares.
The question now is whether investors will continue piling into shares at a discount or return to selling ROKU stock.
Roku: From Set-top Boxes to a Streaming Giant
Roku has been around since well before cord-cutting came into vogue. In fact, the company was founded all the way back in 2002.
The first set-top boxes were developed in conjunction with Netflix (NASDAQ:NFLX), which was looking for ways to evolve from a company that simply shipped DVDs by mail. Netflix decided to spin off the Roku business into its own company in 2008 so Roku could enter into third-party agreements with other streaming services.
Obviously, this worked out well for both companies. Netflix is the king of streaming content, while Roku is the top streaming service in both the U.S. and Mexico.
Roku is also starting to get in on the content game. Roku Originals launched on the Roku Channel in May, featuring original scripted and unscripted series, as well as documentaries. And Roku just released its first original movie, “Zoey’s Extraordinary Christmas.” Over the next two years, the Roku Channel is expected to launch 50 new original programs.
Cord-Cutting, COVID-19 Make Roku a Star
Two major trends converged roughly a year and a half ago to make ROKU stock a breakout star: cord-cutting and the coronavirus pandemic.
As we all experienced first-hand, the coronavirus pandemic and resulting stay-at-home orders made home entertainment more popular than ever. From its March 2020 bottom to its early 2021 high, ROKU stock skyrocketed from around $58 per share to nearly $487, gaining 736% in 11 months.
In addition to the pandemic, the company is benefitting from the cord-cutting trend in which consumers are canceling or forgoing traditional cable TV in favor of the myriad streaming options available.
According to eMarketer, 35.5 million U.S. households, or around 27%, will have canceled their pay-TV subscriptions by the end of this year. The researcher predicts that number will jump to 46.6 million households, or more than 35%, by the end of 2024.
Of course, those are just the people who are canceling their cable or satellite TV subscriptions. There is an ever-growing cohort who has never had a traditional TV subscription and don’t plan to.
According to Pew Research, more than 60% of people age 18 to 29 who don’t have a traditional TV subscription say they have never had one. And more than 70% of all age groups polled who do not pay for a traditional TV service say it’s because it’s not necessary. All the content they want to watch can be accessed online.
Continuing to capture a large share of this population should not be hard for Roku. Its hardware, now in its 10th generation, gives streaming content providers like Disney (NYSE:DIS), HBO Max, Netflix, Paramount, Apple (NASDAQ:AAPL) TV and Amazon (NASDAQ:AMZN) Prime Video convenient access to all those new customers. Roku provides the funnel for its customers to access all those channels and more.
But the hardware only makes up a fraction of Roku’s revenue. The company actually gets much more from advertising, which will continue to be an important revenue source as companies follow consumers and look for ways to get their ads in front of streaming viewers.
Roku’s Q3 Report Disappoints Investors
For the third quarter, reported in mid-November, Roku said player revenue fell 26% year over year to $97.4 million. However, platform revenue, which includes advertising, jumped by 82% from a year ago to hit $582.5 million.
Meanwhile, total net revenue for the third quarter jumped by 51% from a year ago to $680 million. Average revenue per user (ARPU) reached $40 for the first time in the company’s history and was up 49% from a year ago. And the number of active accounts grew by 1.3 million from Q2 to 56.4 million.
The company beat analysts’ estimates on earnings per share, coming in at 48 cents, or 8 cents better than expected. However, it missed on revenue and the number of active accounts. Fourth-quarter revenue guidance of $885 million to $900 million also came in below expectations.
Roku blamed its slower-than-expected growth on supply chain disruptions that are affecting manufacturers around the world. The company also noted that while unit sales were down on a year-over-year basis, the Q3 2020 numbers were artificially high because of massive demand for Roku devices during the pandemic.
Those are fair complaints. As I’ve noted in many previous stories, 2020 was a crazy year and threw a lot of metrics out of whack. So, I’m not concerned at all that Roku didn’t improve on the massive growth it saw during an unprecedented pandemic.
The Bottom Line on ROKU Stock
ROKU stock sold off sharply following the Q3 report and remained in a free-fall until this week’s bounce. The YouTube deal is certainly a plus for the company and removed a headwind for the stock.
Interestingly, one of the biggest Roku bulls is Cathie Wood of ARK Invest. Early last month, it was announced that two of the exchange-traded funds she runs took big positions in ROKU stock.
The Ark Innovation ETF (NYSE:ARKK) and ARK Next Generation ETF (NYSE:ARKW) bought over 200,000 shares of Roku combined. ROKU is now the No. 3 holding in ARKK, with a position worth nearly $949 million. And it’s the No. 7 holding in ARKW, with $205 million in shares.
Obviously, Wood is expecting big things from Roku in the coming months. Considering how far Roku has fallen in the past six months, ROKU stock certainly has plenty of room to run.
On the date of publication, Patrick Sanders did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders.