One of the clear cynical beneficiaries of the onset of the coronavirus pandemic, Roku (NASDAQ:ROKU) – a manufacturer of smart digital media players and an ad-supported content streaming provider – has suffered from a changing of tides. Adding to its woes, Wolfe Research analyst Peter Supino downgraded ROKU stock, expressing concerns about a diminishing total addressable market. Amid consumer economy pressures from soaring inflation, Supino’s concerns aren’t readily ignorable.
In particular, the Wall Street analyst voiced concerns about Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS), both premium content providers with paid subscription bases that are eyeballing ad-supported media initiatives in 2023. With these two content giants muscling their way into the free (but commercial-laden) entertainment sector, ROKU stock may suffer from a dilutive effect.
As a result, Supino worries prices for ad impressions could come down, thus downgrading ROKU stock to “underperform” from “peer perform” late Monday. In a research note, the analyst stated that “rather than expanding the pie,” the entries of Netflix and Disney into ad-supported content could end up lowering the cost per mille (or CPM), or the price for advertising impressions, due to higher supply volumes, per MarketWatch.
Essentially, the new entrants “push dollars away from non-premium categories.” That’s a major problem for ROKU stock, as the underlying company may be well-known for its low-margin hardware but actually derives most of its revenue from advertising initiatives.
Shifting Consumer Trends Hurt ROKU Stock
Significantly, ROKU stock has come almost full circle, with its price point pinged during the spring doldrums of 2020. On March 20 of that year, the weekly average price of ROKU was $76.13. As of this writing, shares are trading hands at a few pennies below $79.
The first half of this rags-to-riches-to-rags tale stemmed from the coronavirus pandemic. As Covid-19 transitioned into a real domestic crisis, government mandates ordered people to shelter in place. With non-essential businesses temporarily shuttered, consumers had few choices for entertainment. Cynically, streaming services stepped into the gap.
However, the second half of the tale also stemmed from Covid-19, but in an unfavorable manner. Like a once-unique pop song that corporate radio bludgeoned with excessive airplay, people were tired of binging streaming content while cooped up at home. Instead, a new phenomenon – revenge travel – emerged from the carnage, redirecting consumer dollars away from the underlying business of ROKU stock.
Inflation Takes Its Toll
However, it’s not just the aforementioned redirecting that was problematic for ROKU stock. Rather, because of the crippling nature of the soaring inflation rate, household spending in certain discretionary sectors was not accretive but instead sacrificial. Put another way, if consumers chose to travel, many of them were liable to make cuts in other areas.
With the erosion of currency strength roughly equivalent to 13 cents on the dollar since the start of the Covid-19 pandemic, ad-supported content in premium labels like Netflix or Disney would be incredibly attractive to the consumer. Therefore, Roku may find itself increasingly the odd man out.
On the date of publication, Josh Enomoto 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.