Roku (NASDAQ:ROKU) got wrecked by the market for its fourth-quarter earnings report that missed analyst expectations and forecast a weaker-than-expected 2018. Shares of the video streaming device specialist tumbled 20% on the news as CEO Anthony Wood blamed a shortage of memory chips as being largely responsible for the company coming up short.
While the rising prices and inventory shortages have boosted the prospects of chipmakers like Micron Technology (NASDAQ:MU), whose shares have doubled over the past year, maybe Roku investors should actually blame Amazon.com (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) for the device maker's disappointing performance.
Demand for DRAM memory is soaring because hyperscale data centers are proliferating around the world at a speedy rate. Synergy Research says there were almost 400 such data centers operating at the end of 2017, 44% of which were in the U.S., and it sees the number growing to 500 over the next two years.
The biggest operators of these massive data centers are not unsurprisingly those that host the largest public cloud networks, such as Amazon Web Services (AWS), Microsoft Azure, IBM, and Alphabet's Google, which have 45 or more hyperscale data centers each. Apple, Twitter, Facebook, and eBay are also expanding their number of facilities.
While there are no hard and fast rules about what makes a data center hyperscale, the market analysts at IDC say they have a minimum of 5,000 servers and cover at least 10,000 square feet, though they're usually much larger than that. Others add their immense computer architectures to support a vast cloud infrastructure utilizing very high rates of virtual imaging.
Regardless of the precise definition, these centers are consuming vast quantities of available memory storage. For example, IDC says that in last year's second quarter, Amazon alone accounted for more than 10% of worldwide server shipments in the second quarter or some 250,000 machines. Google and Facebook are also ramping up their purchases, helping the worldwide server market to jump 20% in the third quarter to $17 billion.
Supply and demand
While the investments are paying off for Amazon, as AWS surpassed $5 billion in revenue for the most recent quarter, up 45% year over year, it's also taking a toll on memory prices.
Reuters reports the $122 billion chip industry expanded 70% last year and has been on a year-and-a-half-long surge that may only just be easing up.
That might not be soon enough for Roku, which saw revenue for its line of streaming devices fall 6.5% to $102.8 million while gross profits plunged 38% to $9.7 million from $15.7 million last year. Roku says it was forced to airship memory rather than pay for cheaper ocean shipping so that it had sufficient supply on hand, which hurt its bottom line.
So although Roku bore the brunt of investor worry about how its business is shaping up as it tries to pivot from being solely a device maker to becoming an actual streaming platform, it may have been undercut by forces out of its control. Amazon, Microsoft, and Google sucking up all the available oxygen in the room may have hurt Roku more than anything Roku did to itself.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, eBay, Facebook, and Twitter. The Motley Fool is short shares of IBM and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short March 2018 $200 calls on Facebook, and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.