Everyone Is Talking About This Stock. Is It a Good Long-Term Option?

The streaming wars have never been more intense, characterized by endless viewing options on the market, all vying for consumer attention. One company in particular, Roku (NASDAQ: ROKU), might be an attractive investment because of its agnostic stance on its platform’s content services. In other words, the thinking is that as more people cut the cable cord and move to streaming, Roku should benefit.

The business has been in the news lately, prompting investors to reassess whether this streaming stock makes for a good long-term option. Let’s take a closer look at what’s going on with Roku.

Recent developments

At the Consumer Electronics Show in Las Vegas this past week, Roku CEO Anthony Wood mentioned that the company ended 2022 with 70 million active accounts, up 16% from 60 million at the end of 2021. What’s more, he pointed out that the total number of hours streamed on Roku’s platform was a whopping 23.9 billion in the fourth quarter, compared to 19.5 billion hours in Q4 2021. These growth trends are a breath of fresh air in what is becoming a difficult macroeconomic environment.

In addition to these positive data points, perhaps the most shocking bit of news was Roku announcing it will launch its own set of branded TVs starting this spring. This follows news in late 2021 from e-commerce juggernaut Amazon that it would be doing the same, introducing its own smart TVs.

I’m surprised by this move from Roku. Selling televisions is a notoriously low-margin business. Prices tend to go down over time, and customers don’t have much loyalty when it comes to specific brands. Additionally, Roku will now be competing directly with the third-party TV manufacturers that carry its pre-installed operating system.

However, I can understand what Wood and his team might have been thinking with this strategy. The goal is to raise the number of households Roku is in and continue growing active accounts and hours streamed to increase monetization. Time will tell what will happen.

What should investors do?

Roku operates a three-sided ecosystem that connects viewers, content companies like Netflix and Walt Disney, and advertisers. It sells hardware devices, like its well-known media sticks and upcoming TVs, while also entering into agreements to share advertising and subscription revenue. The business has posted stellar historical top-line gains.

However, profits have been elusive thus far as Roku has focused entirely on growth at the expense of the bottom line. This strategy was generously rewarded in a low-interest-rate environment before 2022, but the tides have shifted. Investors now crave net income and free cash flow, especially in a monetary-tightening environment like the one we’re in currently.

Another factor negatively impacting the business is a softer ad market. Behemoths in the digital ad industry, Alphabet and Meta Platforms have both reported a slowdown in their businesses as companies look to significantly cut spending on marketing efforts. And because this is Roku’s bread and butter, albeit on a TV, it’s also feeling the pain.

Furthermore, Roku has some stiff competition. While it does brag about having the top market share in the U.S. when it comes to TV operating systems, Alphabet, Amazon, and Apple are all battling it out to control the living room. These tech giants have much deeper pockets and can survive for longer when compared to Roku and its quest for profitability.

Therefore, if you’re a shareholder who believes that Roku will maintain its lead in the market, benefit from more consumers and viewing hours moving to streaming over time, and ultimately stop bleeding cash, then it makes sense to remain an owner of the stock. A compelling valuation at a price-to-sales ratio of 1.9, it’s nearly the cheapest in its history. This also might be an important factor for you.

On the other hand, if you think 2022 is a clear sign of the beginning of the end for Roku — a new reality where account growth will slow, net income will remain a pipe dream, and competition intensifies — then this is a stock you should stay away from without any hesitation.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Neil Patel has positions in Alphabet and Amazon.com. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Meta Platforms, Netflix, Roku, and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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