Roku stock plummets: What’s wrong with the video streaming giant?

Technology stocks have been completely down lately. But these gains are concentrated among a few giant corporations and beneficiaries of the artificial intelligence (AI) boom. Although you might not think so when you look at the overall market return chart, many small-cap technology stocks are doing badly.

One of the stocks that experienced major difficulties was Roku (Roku 1.88%). This streaming TV platform is down 87% from its all-time high, and the stock is down 30% after its latest earnings report earlier this month. Let’s take a look at what went wrong and whether the stock is ultimately a buy at this bottom.

ROKU data by YCharts.

Usage increases but profits are not generated

Roku is known for its streaming TV and media viewing software platform, serving as a portal for many people to access streaming channels and connected TV services. Netflix or disneyDisney+. This year, the company continued to expand its presence across North America and in other regions of the world. Active Roku accounts reached 80 million in the fourth quarter of 2023, an increase of 14% year over year.

Usage from these active accounts continues to grow, with total streaming hours exceeding 100 billion in 2023, up 21% year-over-year in Q4. Importantly, usage of Roku’s own Roku Channel streaming service has increased 63% year-over-year and is now one of the largest services in the US. The Roku channel could be a valuable asset because it gives Roku vertical integration, control over several stages of the consumer entertainment experience, and leverage bargaining power when negotiating with advertisers.

To make money, Roku built (and continues to build) advertising and promotion services for its streaming platform. The problem is that monetization is growing slower than usage. Platform revenue (essentially advertising revenue) grew 13% year over year in the fourth quarter, and revenue per user fell 4% year over year in 2023. This led to a year without profits and an operating loss of $793 million. in 2023, compared to $531 million in 2022.

The numbers are going in the wrong direction and investors are not happy. This is why stocks were sold off again at the beginning of the year.

How big should your streaming platform be?

Roku has shown that it can continue to increase active users. The company is now the top streaming TV operator in Canada and Mexico, and has plans to expand into other Latin American markets.

With 80 million accounts and over 500 million people in Canada, the United States, and Mexico, our core markets have plenty of room to grow. And many Roku TV models are currently on sale in the UK.

Ads are certainly usage-based, but the concern is: Do these advertisers need, much less want to use Roku? Now, despite Roku’s massive size, many ad buyers seem to prefer platforms like YouTube instead.

YouTube had $9.2 billion in ad revenue in the fourth quarter, and Roku saw none of it. In 2023, his overall revenue (some non-advertising) was less than $3.5 billion.

At the moment, people are spending a lot of time using Roku’s platform and getting little profit from the company, which is a bad situation.

Profit is the only thing that matters to shareholders

Companies can increase their profits as much as they want. But what really matters to shareholders over the long term is earnings. Roku lost more than $700 million last year and could lose money again in 2024.

The stock doesn’t look cheap, even assuming it has the potential to generate profits if it wants to roll back its growth strategy. If the theoretical profit margin was 10%, Roku would generate annual profits of $350 million on revenue of $3.5 billion. If its revenue increases to $5 billion, Roku could probably generate $500 million in revenue within a few years.

The company’s market capitalization is currently $9 billion. If the company had revenue of $350 million, it would have a price-to-earnings ratio (P/E) of 26, and if it had revenue of $500 million, it would have a P/E ratio of 18.Neither looks that cheap, especially when I remember these theoretical Revenue that Roku isn’t generating today.

Either you expect Roku’s revenue to grow significantly over the next few years, or you believe that its profit margins will change significantly. Otherwise, it’s best to avoid the stock, even though the price has fallen significantly.