It's been a wild ride for Roku (ROKU -0.34%) investors over the last few years, and the streaming platform's fourth-quarter earnings report didn't help change the negative market sentiment that has weighed on the stock price lately.
Investors knew supply chain issues would impact sales of smart TVs preinstalled with Roku software. But the level of deceleration in growth across key operating metrics like active accounts, streaming hours, and revenue led one analyst to downgrade the stock to a sell rating, citing increasing competition.
Is competition to blame for Roku's weak performance?
Factors contributing to slower growth
Pivotal Research Group and MoffetNathanson are two firms that have downgraded Roku shares to a sell rating in recent months. Analysts at both firms reference competitive pressures for their bearish outlooks on Roku.
The latest results certainly validated their views. Roku's active accounts decelerated to a 17% growth rate over the year-ago quarter, down from the third quarter's 23% growth rate. Also, total streaming hours on the platform grew 15% in Q4, down from 21% in Q3.
These numbers are disappointing, given that Walt Disney reported a very strong quarter for Disney+. Roku usually benefits when top services it partners with launch new content, particularly something as popular as Disney's The Book of Boba Fett, which launched last quarter.
Management credited the decline in active accounts to supply chain challenges pressuring the sales of TVs and Roku players, which are needed to grow the user base. Player revenue declined 9% year over year and made up less than 20% of Roku's business.
Roku faces plenty of competition from several tech companies that make their own TV streaming devices. Apple TV has a 2.7% share of the market, Alphabet's Android TV has 5.9%, Amazon Fire commands 6.4%, and Samsung's Tizen has a 12.7% share. Roku's share was estimated at 6.4% last year, based on data from Statista.
It's a very fragmented market, and the deep financial pockets of Amazon and Apple, specifically, should not be taken lightly. It's also noteworthy that another competing TV operating system provider, Vizio, has posted faster growth in active accounts than Roku recently.
Competition is heating up, but it's possible that management is shooting straight with investors and that Roku's slowing growth is primarily due to a weak market for TV sales. We won't know what is actually impacting Roku's performance until the supply chain issues are resolved.
Advertising is an opportunity, but...
Roku has its own advantages, most notably collecting first-party user data to deliver more effective ads on the platform. Sales of Roku player devices comprise a small percentage of total revenue. Most of Roku's revenue comes from selling advertisements on its platform, and it's capitalizing on this well. Average revenue per user grew 43% last quarter, contributing to a 33% increase in total revenue.
Advertising is a big opportunity for Roku. Consumers still spend more than twice their viewing time watching traditional TV over streaming, but Roku could see sharply higher ad spending on the platform over time as that gap closes.
However, to generate sustained growth from advertising, they must maintain consistent growth in new users. After all, Roku can realize only so much growth over time from monetizing existing users. That's why the deceleration in active accounts is concerning and raises questions about Roku's competitive position.
Don't buy the stock just yet
A total of 24 out of 31 analysts on Wall Street still rate the streaming stock a buy. The stock trades at a price-to-sales ratio of 6.7, compared to 24 earlier last year, so it is a better value, but before buying shares, I would wait to see whether Roku's active account growth can reaccelerate.