Shares of media hardware maker and video-streaming company Roku (ROKU) plunged below $100 per share last week, as Netflix (NFLX) sent shockwaves rippling through the entire video streaming market. Roku stock is now down around 80% from its peak reached back in July.
Undoubtedly, all streaming plays sank in sympathy with Netflix over the past week as the streaming giant unveiled massive subscriber losses, inspiring billionaire investor Bill Ackman to dump his big stake at a substantial loss.
With Netflix posting its second consecutive quarter of concerning weakness, getting into video-streaming is no longer the same compelling market vertical it used to be. If anything, jumping into the maturing streaming market introduces risk and uncertainty, with no guarantees of a significant revenue boost.
Indeed, media device sales have slowed over at Roku. Its streaming content on the Roku Channel may be seen as a potential invigorator of top-line growth. Becoming more Netflix-like may be the ultimate end goal for such a firm.
However, after witnessing what happened to Netflix thus far in 2022, it's clear that steering further into the business of streaming is no longer worthy of a richer multiple. The market has gotten too crowded, and it'll be harder and more expensive to compete.
With a hazy roadmap ahead and plenty of headwinds, I am neutral on ROKU stock..
Video Streaming: Not a Growth Market
In recent years, streaming has matured by leaps and bounds, with media and big tech firms both getting in on the action. Big tech firms with deep pockets can afford to lose big money on their streaming initiatives. They're not as big a deal for such firms as Amazon (AMZN).
If anything, Amazon is in its comfort zone in video streaming these days. Competitive environments where it can give rivals a squeeze with its deep pockets while producing value for consumers is where Amazon thrives.
Though there are still large economic profits in the streaming space, the pure-play streamers may be at a considerable disadvantage to the likes of a behemoth like Amazon that can afford to see its streaming service weaken at any given instance.
As streaming options grow amid inflation and harder economic times, I expect consumers to be more willing to flip-flop between services based on the quantity and quality of a platform's content slate at any given time.
What puts a firm like Amazon ahead of the pack is its inclusion of Prime Video as a part of a bundle. Such bundled services are a great value and are likely to be immune to any increased churn within the video-streaming market.
At the end of the day, it's the best bundle that could win the heart of consumers. With not much else to offer other than exclusive content, Roku could see itself losing more of its edge.
Roku to Clash with Netflix
Following the underwhelming quarterly release, Netflix CEO Reed Hastings opened up to the possibility of introducing a budget-friendly, ad-supported tier to its service.
The advent of an ad-supported tier would put Netflix in a clash with The Roku Channel, which has done quite well in the "free" corner of the video-streaming market. Arguably, The Roku Channel is the biggest differentiating factor that separates it from its rivals and the biggest key, in my view, to propelling growth.
Though the company expects the development of RokuOS to improve revenue growth in the future, I fail to see how it will allow Roku to improve its competitive stance as Amazon (and other rivals) continue moving in, both in hardware and streaming.
For now, I view The Roku Channel as a major wildcard. With plenty of content on the way, something is bound to stick. Unfortunately, it will take considerable spending to power growth from here.
Wall Street's Take
According to TipRanks, ROKU stock comes in as a Moderate Buy. Out of 20 analyst ratings, there are 16 Buy recommendations, one Hold recommendation, and three Sell recommendations.
The average Roku price target is $178.15, implying 78.1% upside potential. Analyst price targets range from a low of $95 per share to a high of $305 per share.
Bottom Line on Roku Stock
Video streaming stocks faded in a big way following the big blow-up of the Netflix quarter. Still, it may be too early to conclude that the whole streaming market is bound to sink.
If anything, less power in the hands of the No. 1 player may be healthier for the broader basket of streamers, as other rivals begin to take share.
Though Amazon recently renewed its partnership with Roku to include Prime Video and IMDb TV on Roku, it's clear that Roku and Amazon are more "frenemies" in the fiercely competitive world of streaming. If Roku can't keep up, there's no telling what the future holds for the relationship.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
