Streaming-platform leader Roku (ROKU 5.41%) was a huge winner thanks to the pandemic. With people stuck at home, spending more time watching TV was a popular entertainment option. Unsurprisingly, like many stay-at-home stocks, the company has hit a bit of a rough patch in a more normalized world.
Roku is set to release its 2021 fourth-quarter financial results on Feb. 17 after the market close. And shareholders of this streaming stock need to focus on any supply chain updates in the upcoming earnings report. Let's understand why this is important.
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Supply chain issues are hurting growth
During Q3 2021, Roku added just 1.3 million net new active accounts, less than what the business gained in each of the previous three quarters. Besides falling engagement, with people spending less time at home and watching less TV, Roku has been plagued by one other big problem in recent quarters: supply chain bottlenecks. This is an issue that businesses across various sectors are currently facing, so it's not unique to Roku.
However, the company's gross margin for its Player segment, which includes sales of media sticks, was negative in both the second and third quarters of 2021. Management has chosen to emphasize trying to grow the user base at the expense of the player gross profit. Therefore, they have decided not to pass along elevated input costs to consumers in the form of higher prices, a decision I think is the right strategic move for the long-term success of the company.
Roku also has licensing agreements in place with a number of different TV manufacturers, who have been impacted by supply chain delays themselves. Inflation is causing higher component pricing, resulting in Q3 U.S. TV sales being lower than the pre-pandemic level in 2019. Clearly, a situation like this is not favorable to a business like Roku that relies on getting as many devices (built with its TV operating system) in as many living rooms as possible.
Although the economic environment is out of Roku's control, any commentary the leadership team gives investors about inflationary pressures or supply chain woes will be extremely important to listen to. Amidst the headwinds, being able to continue growing active accounts of 56.4 million and quarterly streaming hours of 18 billion (as of Sept. 30), would be a very encouraging sign.
Platform segment is crucial
While the majority of Roku's revenue -- 85.7% in Q3 2021 -- comes from its Platform segment, the hardware business is still obviously important. This is because sales of media sticks bring in more users, which the company can then monetize via high-margin subscription and advertising fees as people watch shows and movies on Roku's platform.
Management guided for Q4 2021 revenue of between $885 million to $900 million, or a 37.3% year-over-year rise. This would be the slowest quarterly sales growth since Q1 2018. Gross profit is expected to be $385 million (at the midpoint), making the gross margin 43.1%. This would be the lowest since Q2 2020.
"Looking ahead, our business fundamentals remain strong but we are mindful that the challenges created by the global supply chain disruptions will likely continue into 2022," Founder and CEO Anthony Wood and CFO Steve Louden highlighted on the Q3 2021 shareholder letter.
No doubt, Roku is experiencing a major slowdown compared to the rapid growth it registered during the depths of the pandemic over the past few quarters. Problems with the global supply chain definitely deserve blame. Investors should be looking for any clarity that management provides in this regard.
If there's positive news, like seeing the hardware business return to gross profitability, as well as a continued increase in active accounts and hours streamed, it makes the stock, which is down nearly 70% over the past six and a half months, a compelling buy right now. I believe results have a good chance to surprise the market to the upside, as pessimism is pervasive right now.
