Reevaluating my thesis on ROKU: What I got wrong and why I’m still holding

Original thesis:

• Quick introduction: I've been an investor in ROKU since 2020 right before HBO Max made a deal to be available on ROKU. I've invested over $100K into the company via dollar cost average and have lost +60% of my investment due to poor stock performance.
• Active accounts: More people are going to cut the cord because cable is more expensive & less flexible than streaming. Along with international expansion, this would have helped ROKU add +10m active accounts per a year.
• Average revenue per user: Shift of advertising dollars from Linear TV to Streaming TV. In 2020, 40% of U.S. TV time was streamed but only 13% of TV ad budgets were spent on streaming. This would have helped average revenue per user (ARPU) as advertisers & their dollars followed potential customers to close the gap and help ROKU grow revenue by 30% – 40% on an annual basis.
• Competitive positioning: Market leader with +38% of U.S. streaming players & +33% of U.S. smart TVs has their operating system. Impressive that they have maintained a competitive lead for over a decade against the largest tech companies in the world including Amazon, Google, Apple, Samsung, and LG.

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What has changed from my past thesis that's negative:

• Active Accounts will be lower-than-expected: ROKU pulled forward multiple years of customer growth during the COVID pandemic as people were stuck at home & needed a smart TV. So the company is closer to maturity as it penetrated most of its TAM especially in the U.S. My expectation for active account growth is to be 5m – 8m per year, which will primarily be low-value accounts from their international expansion that have a lower monetization value along with a few high-value U.S. accounts that will be acquired as households continue to leave cable & defections from competition.
• More cyclical than I thought: I thought that ROKU would enjoy a 30% – 40% revenue CAGR as advertising dollars shift from linear TV to streaming TV. But, ROKU just withdrew it's guidance for 35% y/y revenue growth in FY '22 and will most likely only grow in the high-teens as advertisers pull back on marketing spend in response to the economy.
• OneView & the dynamic programmatic ads is overrated: They are immaterial to the business and it's best to focus on the fundamental blocks for the company today. ROKU primarily gets most of their advertising dollars from the scatter market and a little from upfronts. The ads will work similarly as linear TV. I'm not going to get distracted by the other parts of the business.

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What has changed from my past thesis that's positive:

• Netflix & other streaming players offering an AVOD option: My base case was that Netflix & most of the larger streaming apps would offer an ad-free subscription. But, Netflix & Disney + are now more open-minded to an AVOD (advertising video on demand option), which may attract more households to leave cable because they can now better afford subscriptions since the AVOD options generally are priced at a 25% – 50% discount. This provides a little relief to my outlook for ROKU's active account growth, but I'm more excited this will help boost my outlook for ROKU's ARPU since ROKU gets a 20% – 30% share of advertising.
• Sports being offered on streaming: Three items I see holding back households from leaving cable: it would be too expensive to bundle multiple streaming apps to watch all of the content a household wants, no sports, and no news. The AVOD options from streaming apps addresses point 1 while streaming apps are also addressing point 2. NFL, NBA, MLB, and MLS are now available to be streamed that I didn't expect before especially given the lucrative deals all of these leagues originally signed to be on linear TV.
• IDFA, digital privacy changes from Apple, and upcoming for Google: I didn't expect this to happen. This is making it really difficult for advertisers to efficiently target customers that rely on tracking customers based on their iPhone activity. I expect Google to do something similar for Android & Chrome. ROKU stands to benefit not only from linear TV ad dollars shifting to streaming, but also ad dollars from mobile as advertisers look for an effective option to target customers.

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What hasn't changed from my past thesis:

• Shift from cable to streaming: 47.6% of U.S. households stream and is expected to be 57.6% by 2026
• Shift of advertising dollars from Linear TV to Streaming TV: 50% of U.S. TV time is streamed, but only 22% of TV ad budgets is spent on streaming. That gap will need to close as advertisers need to follow where the customers are at.
• Competitive positioning: ROKU has maintained a competitive lead for over a decade against the largest tech companies in the world including Amazon, Google, Apple, Samsung, and LG. If these companies couldn't topple ROKU for over a decade and ROKU hasn't slipped in their product roadmap, how can one seriously expect them to change that dynamic?

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Why I'm still holding and I may buy more:

• Balancing my original thesis against things that have changed: Most of my original thesis remains, but has been weakened due to me overestimating customer growth after the pandemic, the secular resilience of the company, and the impact of initiatives that are a small part of their business. There are a few new items like tailwinds from AVOD streaming options, sports, and IDFA tailwinds. But on a net-net, my thesis has been the weakened and ROKU's stock already reflects that by going from the high $400s to the $60s.
• TINA: I can't think of many stocks that will generate strong shareholder value in a challenging stock market & macro environment. There is no alternative so I figured how about I stay & invest in a beaten down company and ROKU's stock will probably rise a lot faster than other stocks when the environment improves since it's a smaller company, more sensitive to an improving economy given the reliance on advertising spend, ROKU is not losing to competitors, and streaming TV is not losing to other industries.
• Negative stock perception: The recent earnings call was horrible for ROKU and analysts across Wall Street has responded with downgrades including Bank of America with a $55 price target. I find it difficult to find good opportunities in stocks that everyone crowds around and I'm hoping to take advantage of the poor sentiment today, ROKU continuing to execute with all of the tailwinds in streaming TV industry, and eventually ROKU's stock will go up when the economy & advertising spend improves
• Potential acquisition target if things get really bad: ROKU is the #1 TV operating system and has over 60m accounts. The company's market cap is over $8 billion, so it's a feasible & attractive acquisition target for a big tech company that wants to be the gatekeeper in the streaming TV ecosystem. I expect ROKU to weather the tough economy, keep executing, and continue operating as an independent company. But, it makes me comfortable that ROKU does a really good job at its niche and many companies will find what ROKU does is attractive if an acquisition is potentially the best exit option for investors.