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Why Roku Shares Crashed Today

By Anders Bylund – Nov 4, 2021 at 4:30PM

Key Points

  • Earnings came in strong in the third quarter but investors are worried about the top-line trend.

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Roku investors were not impressed by the company's unbalanced combination of reported results and forward-looking guidance.

What happened

Shares of entertainment technology specialist Roku (ROKU -3.64%) fell as much as 8.9% on Thursday, following the company's third-quarter earnings report. The reported figures were a mixed bag and Roku's revenue guidance for the next reporting period fell far short of analyst expectations.

So what

In the third quarter, Roku's sales rose 51% year over year to $680 million. This result was slightly below Wall Street's consensus estimates of $683 million. On the bottom line, earnings surged from $0.09 to $0.46 per diluted share. Here, your average analyst would have settled for earnings near $0.06 per share.

For the fourth quarter, Roku expects revenue to land in the neighborhood of $892 million, 37% above the year-ago reading but well short of the $944 million analyst consensus. Earnings are headed toward a breakeven result but analysts were projecting a net profit of $0.22 per share. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is expected to fall from $114 million in the fourth quarter of 2020 to $70 million.

A person with a shocked expression holds a remote control and sits on a couch.

Image source: Getty Images.

Now what

Breaking Roku's sales down in greater detail, you'll find that hardware sales fell 26% year over year while ad sales, original content, and other items under the platform revenue banner surged 82% higher. A global shortage of microprocessors weighs on Roku's direct hardware sales and also limits sales of smart TVs from other electronics makers that run Roku's software. You've heard this story before, as the same issues are holding back business results in pretty much every market sector nowadays.

The company does need to work out its troubled partnerships with Amazon and Alphabet, both of which are in the process of separating their own digital media products and services from the industry-standard Roku platform.

That being said, Roku will still post impressive revenue growth and cash-based profits in the fourth quarter. I'm convinced that the company will find common ground with its larger technology rivals in due time, because none of the players in this drama want to miss out on the upside of working together. As a shareholder in all three companies, I strongly prefer a quick resolution of Roku's content conflicts.

Therefore, I see a wide-open buying window in today's negative price action. Roku will come back from these challenges and chances are that the company is exaggerating its fourth-quarter guidance cuts in the first place.

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. Anders Bylund owns shares of Alphabet (A shares), Amazon, and Roku. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Roku. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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