Why Roku Stock Sank Tuesday

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What happened

Shares of Roku (ROKU -8.79%) were down 7.7% as of 10:12 a.m. ET on Tuesday. The move came after two analysts weighed in with their views on the company’s near-term direction in a challenging economy.

Analysts with Wolfe Research and Raymond James Financial cited challenges for Roku in a tough advertising market, which could hurt Roku’s ability to invest in technology and content in the near term. The Wolfe analyst downgraded the stock to underperform, while Raymond James initiated coverage with a market perform rating.

So what

Advertising is the primary source of revenue for Roku, so the streaming platform isn’t immune to the impact of a recession.  However, it’s worth noting that one ad agency still sees a strong second half for the North American ad market in 2022. Zenith expects North America to be the strongest ad region in the world, with spending expected to grow 12% this year, driven by the mid-term elections, Winter Olympics, and soccer World Cup. 

There is concern that as the economy weakens, advertisers could reduce spending, and therefore hurt Roku. But this scenario may not play out, as studies have shown that companies that maintain or increase ad spending during recessions see sales and market share rise when the economy inevitably rebounds.

Now what

Through the first quarter, Roku was still posting solid revenue growth, despite inflationary pressures, geopolitical conflict, supply chain issues, and other economic headwinds. Platform revenue grew 39% year over year. The recent collapse in the stock price could be a good buying opportunity before better news shifts investor sentiment again. 

It’s been a brutal year for streaming stocks. Roku has been one of the worst performing ones of the bunch, down 82% from its all-time high in 2021, so a lot of bad news is already priced in. But these companies are serving a growing market for streaming services as more people shift to digital-entertainment options. 

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.