Roku's (ROKU -10.29%) stock plunged 22% during after-hours trading on Feb. 17 following its fourth-quarter earnings report.
The streaming platform and device company's revenue rose 33% year over year to $865.3 million, which broadly missed analysts' expectations by $28.8 million. Its net income declined 65% to $23.7 million, or $0.17 per share, but still beat analysts' estimates by $0.13.
Did investors overreact to those mixed headline numbers, or was the sell-off justified? Let's dive deeper into Roku's report to decide.
Image source: Getty Images.
First, the good news...
Roku benefited from stay-at-home tailwinds during the pandemic in 2020, but that growth spurt set it against tough year-over-year comparisons in a post-lockdown world. Roku's growth in active accounts, streaming hours, and average revenue per user (ARPU) notably decelerated over the past year, but all three metrics continue to improve sequentially:
|
Period |
Q4 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
|---|---|---|---|---|---|
|
Active accounts (millions) |
51.2 |
53.6 |
55.1 |
56.4 |
60.1 |
|
Growth (YOY) |
39% |
35% |
28% |
23% |
17% |
|
Streaming hours (billions) |
17.0 |
18.3 |
17.4 |
18.0 |
19.5 |
|
Growth (YOY) |
55% |
49% |
19% |
21% |
15% |
|
ARPU |
$28.76 |
$32.14 |
$36.46 |
$40.10 |
$41.03 |
|
Growth (YOY) |
24% |
32% |
46% |
49% |
43% |
Data source: Roku. YOY = Year-over-year.
Furthermore, Roku's quarter-over-quarter growth in active accounts and streaming hours both accelerated in the fourth quarter. That sequential acceleration suggests it isn't losing ground to big tech rivals like Amazon, Alphabet's, and Apple in the streaming device and platform market.
We can also see a similar pattern with Roku's platform and player revenues. The year-over-year growth of both segments decelerated over the past year, but they still accelerated on a quarter-over-quarter basis in the fourth quarter:
|
Period |
Q4 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
|---|---|---|---|---|---|
|
Platform revenue |
$471.2 |
$466.5 |
$532.3 |
$582.5 |
$703.6 |
|
Growth (YOY) |
81% |
101% |
117% |
82% |
49% |
|
Player revenue |
$178.7 |
$107.7 |
$112.8 |
$97.4 |
$161.7 |
|
Growth (YOY) |
18% |
22% |
1% |
(26%) |
(9%) |
|
Total revenue |
$649.9 |
$574.2 |
$645.1 |
$680.0 |
$865.3 |
|
Growth (YOY) |
58% |
79% |
81% |
51% |
33% |
Millions USD. Data source: Roku.
The sequential acceleration of Roku's platform business suggest it's benefiting from the development of fresh content for the Roku Channel, its new partnerships with TV manufacturers, its resolution of its YouTube dispute with Google, and the market's growing demand for connected TV (CTV) ads.
Roku's platform business also continued to grow even as supply chain challenges throttled its ad sales to the auto and consumer packaged goods (CPG) sectors. Its growth should improve as those headwinds wane.
The accelerating quarter-over-quarter growth of Roku's player business during the holidays indicates its brand still stood out against Amazon's Fire TV stick, Google's Chromecast, Apple TV, or other stand-alone streaming devices.
Now, the bad news...
Roku still growing, but its gross margins are gradually deteriorating:
|
Gross Margin |
Q4 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
|---|---|---|---|---|---|
|
Platform |
63.8% |
66.9% |
64.8% |
65% |
60.5% |
|
Player |
2.6% |
13.8% |
(5.9%) |
(15%) |
(28.4%) |
|
Total |
47% |
56.9% |
52.4% |
53.5% |
43.9% |
Data source: Roku.
The platform segment's margins are declining as it generates a higher percentage of its revenue from lower-margin video ads instead of higher-margin content distribution partnerships.
The player segment's margins are crumbling as Roku's devices lose their pricing power and it grapples with higher component and supply chain costs. Roku's player unit shipments actually came in flat year over year in the fourth quarter, but the segment' revenue fell 9% as it reduced its prices.
That imbalance highlights the need for Roku to gradually phase out its loss-leading streaming devices while expanding its platform with additional partnerships with third-party smart TV manufacturers. But to do so, it will need to produce more original content for the Roku Channel -- which could further squeeze its operating margins and throttle its earnings growth.
The outlook and valuations
Roku also provided soft guidance for the first quarter. It expects its revenue to grow just 25% year over year, well below analysts' expectations for 30% growth, and for its gross margin to decline year over year (but improve sequentially) to about 50%. It also warned that the supply chain headwinds for the platform and player businesses would persist throughout 2022.
Roku expects its full-year revenue to rise by the "mid 30s," which matches analysts' estimates for 36% growth. Analysts also expect Roku's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- which more than tripled in 2021 -- to grow another 15% in 2022.
That outlook is decent. But at $112 per share, Roku's stock still isn't a screaming bargain at 72 times forward earnings, 28 times its forward adjusted EBITDA, and four times this year's sales.
Instead, those elevated valuations suggest Roku's stock might drop even further before it proves that its supply chain challenges are transitory. So for now, investors should avoid Roku and stick with more promising growth stocks in this challenging market.
