It has been a brutal year for growth stocks. With the way Roku (NASDAQ:ROKU) ended the year in 2021, I was sure that more pain lay ahead. I did not know how much pain lay ahead, but I certainly didn’t expect this. As of now, Roku stock has eroded this year, down 61% so far in 2022. From the high, it’s down 82%.
It’s been horrendous, and yet, there doesn’t seem to be much reprieve in sight.
Roku might be a king in the streaming world with ambitions for global domination, but the stock market doesn’t care about that. It sees Roku as a growth stock and a streaming stock. Unfortunately, both groups are under pressure — and yes, I view them separately.
Just look at what’s happening to Disney (NYSE:DIS) and Warner Bros Discovery (NASDAQ:WBD). Both stocks are under intense selling pressure despite some combination of strong assets, a low or reasonable valuation and other business segments to pick up the slack. Not to mention, streaming continues to grow overall. That’s despite the issues we’re seeing with Netflix (NASDAQ:NFLX).
So, the streaming industry aside, what’s the deal with Roku stock? Let’s dive in and take a closer look.
Clear Hurdles to Overcome
Overall, Roku has clear issues. For starters, supply chain issues are weighing on the company’s results. Specifically, supply chain issues are weighing on TV production. And given Roku’s built-in capability, that’s weighing on its growth. Not to mention, hardware costs for Roku devices are rising as well, while Roku resists raising prices for consumers.
Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and others can shrug off the rising cost of production much easier than a company like Roku can. Therefore, rather than risk ceding market share to the bigger players, Roku is eating the higher production costs instead of passing them on to its customers.
While one can argue that that is a good strategy, it’s weighing on margins.
Additionally, the company is not yet profitable either, which is never good during a bear market. In a bull market, investors are willing to overlook this reality in lieu of growth. In a bear market, though, things are different.
A Deal With Netflix?
Moreover, there is some speculation that a deal with Netflix is being facilitated. It’s now common knowledge that Netflix is looking to crack down on password sharing and is looking to introduce a new ad-based tier to its offerings. So, given Roku’s ad-based capabilities, the brutal stock performance of both companies and the obvious synergies, a tie-up really does make sense here.
Of course, that doesn’t mean it will happen — but it doesn’t need to.
Netflix is reportedly considering Google for its ad-supply needs, but also NBCUniversal and Roku. If it ends up being Roku, we are talking about a company that has a global reach and hundreds of millions of subscribers. It could be a huge addition for Roku if it pans out.
All things aside, though, there are still positives here.
For instance, analysts expect revenue to grow 34% this year and another 30% in 2023. Last quarter, average revenue per user (ARPU) grew 34% year over year to $42.91. Streaming hours increased by 1.4 billion hours sequentially, platform revenue climbed almost 40% and active accounts jumped from 1.1 million to 61.3 million.
So, despite all the good, there are positives when it comes to ROKU stock.
Bottom Line on ROKU Stock
When we pick a “top stock” candidate for the year, it’s speculation. In this contest, there are no profit targets or stop losses. In that sense, it’s for a bit of fun. But back in reality, I actually have a long position in ROKU stock — one that I have admittedly traded in and out of with an original cost basis between $28 and $40.
Still, it hasn’t been a fun ride in 2022 and yes, it does leave a bitter taste.
My question ultimately becomes, at one point is the market discounting all of the company’s hurdles and potential hurdles in the future? Roku stock has already suffered an 85% peak-to-trough decline.
I don’t know if there will be a tie-up between Netflix and Roku and I don’t know where the low is. However, this $77 area has been of interest in the past. With any luck, it will be one now and Roku stock can carve out some sort of bottom.
If it breaks down further, then the Covid-19 low could be in play near $58. It could go further than that obviously, but to lose that mark — which was extreme even then — would be unreasonable in the long term, in my opinion.
On the date of publication, Bret Kenwell held a long position in ROKU. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.