KEY POINTS

  • Some on Wall Street are attempting to predict the effect of a recession on Roku.
  • Though their concerns are warranted, these headwinds will pass eventually.

What’s going with Roku stock

Shares of Roku stock stumbled on Tuesday, at one point dropping by 5.8%. However, by the end of market hours, it had only slightly recovered to being down 3.4%.

Wall Street’s prediction of the future ad industry caused the pioneer streaming company to fall.

Why we care

According to a report by analysts from William Blair, if a recession were to occur, it could cause Roku‘s (NASDAQ:ROKU) revenue to fall next year. They predict that due to the overall decline in global advertising spending caused by fears of a potential recession, there will be a slump in ad spending in 2023. The firm predicts a decrease of 2% to 8% next year.

According to the experts, Roku’s platform might be one of the most damaged. That’s because advertisers often hesitate to invest money – particularly on “brand-building” ads – during economic downturns. Moreover, analysts claim that spending on such ads does not result in fast returns relative to “performance advertising” on major online platforms. According to them, the effectiveness of advertising on streaming video services isn’t well understood when compared with Google (NASDAQ:GOOG) or Meta (NASDAQ:META), for example.

They believe the worst-case scenario with Roku is that ad revenue would fall by 12% in 2023.

However, the situation was not all terrible. In the ideal scenario, Roku’s revenue might rise by as much as 12%. In addition, without a recession, advertising income for Roku would grow by 22% in 2023.

What now

Roku is currently going through a difficult time because people are starting to leave their homes again and do pre-pandemic activities, resulting in less video streaming. In addition, Roku faces competition from other streaming companies and has been experiencing issues with its supply chain. Even though these problems are only temporary, they have caused the company’s growth to slow down. Therefore, the analysts’ estimates may not be accurate due to the constantly changing situation.

Roku boasts 63 million active accounts, making it the number one streaming video platform. By aggregating viewers’ paid subscriptions and ad-supported streaming content in one place, Roku has become a powerhouse in the industry. Furthermore, its average revenue per user grew by 21% year over year in the second quarter, demonstrating that Roku knows how to extract maximum value from each customer.

As Roku is presently the top company in its field, long-term investors should see these current challenges as only temporary roadblocks on the way to a return of higher growth rates.

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