Roku's (ROKU 2.53%) stock was cut in half over the past 12 months as investors fretted over the decelerating usage of its streaming media devices in a post-lockdown world. Supply chain disruptions also throttled its sales of new hardware players and crushed the segment's gross margins, while rising interest rates -- which sparked a rotation away from pricier growth stocks like Roku -- exacerbated the pain.
Last month, I said investors might be too bearish on the stock, for four reasons: It had just settled a lengthy dispute with YouTube, it was rolling out fresh original content for the Roku Channel, it was gradually expanding overseas, and Cathie Wood's ARK exchange-traded funds (ETFs) continued to accumulate more shares of Roku as it tumbled.
Today, I'll review two more recent developments for Roku that can be considered a green flag and red flag, respectively, and how they might impact its stock ahead of the company's next earnings report in February.
The green flag: Still number one in its largest market
On Jan. 3, Roku announced that the Roku OS was the top smart TV OS sold in the U.S. for the second straight year, based on NPD's Weekly Retail Tracking Service from Jan. 3, 2021 to Dec. 4, 2021.
That top ranking should allay some concerns about Amazon (AMZN 6.19%), which has been aggressively targeting Roku with new Fire TV devices as well as first- and third-party Fire OS smart TVs over the past year.
It also indicates the expansion of Roku's own software platform -- which generated 86% of its revenue and over 100% of its gross profit last quarter -- with third-party smart TV partnerships is paying off.
Smart TV manufacturers are probably more willing to install Roku's independent OS on their devices instead of tethering themselves to Amazon's massive ecosystem. Big box retailers are also likely more inclined to sell Roku-powered TVs instead of Fire TVs, which indirectly lock more customers into Amazon's Prime ecosystem and competing online marketplaces.
Roku also just announced a new smart TV partnership with Sharp in the U.S., as well as similar partnerships with Aiwa and HKPRO in Mexico. That growing list of partners -- which already includes TCL, Hisense, Hitachi, JVC, Philips, and its subsidiary Magnavox -- should widen Roku's moat against Amazon and its other big tech competitors.
The red flag: The sudden resignation of its platform chief
Roku's platform business became its core growth engine under Scott Rosenberg, who was put in charge of the segment in 2017. He previously joined Roku in 2012 as its VP of advertising and business development.
That's why Roku's stock slumped on Jan. 7 when Rosenberg abruptly announced that he would leave "sometime in the spring of 2022." Rosenberg said the decision, though "difficult", was "made possible" by the "incredible bench strength of the platform team and the company as a whole."
Rosenberg said he will continue to lead the platform team and assist in the recruitment process for his successor, but the sudden announcement still cast a dark cloud over the company's future.
The media technology mastermind's departure is troubling because he's leaving just as the company ramps up its production of original content for its ad-supported Roku Channel. Roku set up the foundation for that push by acquiring more than 75 original shows from the failed streaming platform Quibi last year, and it plans to develop over 50 more original shows over the next two years.
If Rosenberg's successor fumbles that risky and capital-intensive strategy, the platform segment's gross margins -- which have gradually trended lower over the past four years -- could crumble.
Does the good news outweigh the bad news?
Roku's market share update and new smart TV partnerships were encouraging, but they can't offset the shock of Rosenberg's upcoming departure. Therefore, the red flag is a lot brighter than the green flag. I expect Roku's stock to remain under pressure this year as investors continue to worry about its supply chain disruptions and slower growth in a post-lockdown market.