The video streaming company’s stock has recently risen due to optimism about Netflix Inc.’s ad-supported subscriber base.
The optimism about Netflix Inc.’s ad-supported subscriber base has recently driven the video streaming company’s stock to its multi-year lows, but that didn’t apply to Roku Inc.
Shares of the streaming service platform on Friday closed at their lowest level since February 2019 and have lost more than three-quarters of their value since early 2022. It was the 12th largest drop in the Russell 1000 Index. Netflix has risen 36% since its mid-June market trough, but Roku has lost nearly the same amount since.
Roku shares rose 4.7% on Monday, participating in an extensive rally for the stock. Netflix shares rose 3.1%.
Netflix, which reports third-quarter earnings on Tuesday, said last week that it will charge subscribers $7 a month for new ad-supported products starting November 3rd. The company’s standard service without ads is $15.49 per month in the US. With this move, Netflix will offer a new chunk of paid subscribers, revenue streams, and ads that it previously avoided.
Roku devices allow you to manage streaming services like Netflix and Hulu. The company sells ads for its own Roku channel and splits some ad inventory with other services. But even if Netflix accelerates its transition to streaming as a marketer audience, investors are skeptical that this will be a meaningful catalyst for Roku.
“The idea is that Roku could see growth in Netflix ads, but I don’t think this will have a huge impact on them,” said Jim Worden, chief investment officer at Wealth Consulting Group, which owns Netflix and Walt Disney. Co. However, I think the headwind facing Roku is too harsh for the stock to be attractive.
“It’s trading at a much lower level than before, but it’s not a great buy. This is a difficult market for any advertiser and there are significant challenges Roku faces at a time when the environment for unprofitable stocks becomes much more difficult.”
Prospects for a highly cyclical advertising market have weakened with the economy, as Alphabet Inc. and a factor contributing to the decline of large players such as Meta Platforms Inc. Roku cited the downturn in TV commercials last quarter, triggering the biggest decline in earnings forecasting stock history.
It also struggled as the Fed raised interest rates to combat inflation. This is a change in easing policy that has fueled the enthusiasm for high-growth stocks during the pandemic. Roku’s value rose from more than $60 billion to $6.8 billion as investors dumped unprofitable stocks in favor of cheap or dividend-paying companies. Roku closed Friday at triple-digit multiples in terms of forward earnings, although only 1.9x expected revenue compared to 8.7% average revenue over the past five years.
Brian Frank, Chief Investment Officer at Frank Funds, said, “Interest rates are so delicious that they risk a name like this and may not be profitable for years.” “Roku never had a business deal in its original location. You’d be offended to think that it will return to that level sooner or later.”
Emotions deteriorated dramatically. Analysts expect Roku to report a loss of $3.06 per share this year, more than double what it had expected in three months. During the same period, the consensus for sales fell 15%.
However, Roku continues to have high-profile Cathie Wood fans. Her ARK Investment Management holds the second-largest number of Roku shares behind Vanguard, with the company holding 8.4% of the outstanding shares.
According to the company’s most recent study, ARK believes Roku stock could reach $605 over the next five years. Closed under $50 on Friday.
“Video ad revenue is likely to be the biggest contributor to our growth over the next five years.” It is estimated that Roku’s revenue will grow 39% per annum to $14 billion by 2026.