Roku (ROKU 2.94%) disappointed investors in its fourth quarter with revenue coming in below the company's own outlook. And now, the company expects revenue growth to continue to slow in the first quarter, predicting it will climb just 25% year over year. Its full-year growth outlook is slightly better, at 35%, but still below expectations. And with a step-up in investments, management sees earnings falling back down to 2020 levels.
The subsequent sell-off of Roku shares is deserved. But the long-term outlook for the company remains strong. Let's see why.
Image source: Roku.
A lot of short-term negativity
Roku is facing a few factors putting short-term pressure on revenue and earnings growth. First is the supply-chain issue that touches just about every industry selling physical goods these days. This problem actually impacts multiple parts of Roku's business.
On the primary level, it increases the cost of producing streaming players and TV sets. Roku has absorbed the increased costs of its players and kept its retail pricing the same. Its TV manufacturing partners, however, can't afford to do the same. TV prices climbed in the back half of the year, which reduced demand. As a result, Roku is not adding as many new users as it could in a normal economic environment. That said, it still managed to add 3.7 million new accounts in the fourth quarter.
A secondary impact of the supply-chain crunch is that it reduces demand for advertising on Roku's ad network. If a car manufacturer is already selling all the cars it can produce at sticker prices, for example, it doesn't have any need for advertising.
The next factor is management's increase in spending to grow the business. Management expects operating expenses to nearly double this year, up more than $1 billion, according to Guggenheim analyst Michael Morris. Roku is investing across the board in its business: the Roku OS, Roku TV program, content for The Roku Channel, and its ad platform. It's also working to expand internationally and monetize new markets.
Importantly, Roku's investing into a relatively uncertain market. It's spending more money on content for The Roku Channel even when many advertisers are still holding back on ad spend. It's working to grow internationally amid a very competitive environment and weaker consumer demand with higher pricing and potential economic slowdowns.
Meanwhile, there's no telling what kind of impact COVID-19 or other global events could have in the future. Management's full-year revenue outlook suggests it sees the pressures easing in the second half of the year, but that's no certainty.
Still a long-term leader in the shift to streaming
While investors should acknowledge the near-term headwinds and the increased risk involved with investing into an uncertain environment, Roku remains one of the best ways to play the long-term shift to streaming.
We saw nearly every media company launch its own streaming service over the last few years. Roku was a clear beneficiary from the new launches as new services needed to advertise to streamers. It could continue to benefit as streamers advertise new content and work to manage churn levels.
Management also pointed out that while about 45% of TV viewing comes via streaming, advertisers have yet to catch up. Just 18% of TV budgets go toward streaming video, CEO Anthony Wood said during the company's fourth-quarter earnings call. We saw the same thing happen with the shift from desktop advertising to mobile, which led to significant growth for companies that focused on attracting mobile users to their apps.
Finally, the international opportunity is still substantial. Roku is still in the very early days of its international expansion. And even in markets where it's establishing a user base, it's not monetizing them at levels even close to its potential. While investors shouldn't expect international users to monetize at the same level as U.S. users, there's plenty of room for growth to outpace the overall growth of the streaming and digital advertising markets in those countries.
So, while Roku stock may face short-term pressure, the current market may present an opportunity for investors to take a position in a company that's poised to remain a leader in the growing market for streaming media.
