It's been a rough earnings season for streaming service stocks, and it's now time for Roku (ROKU 2.55%) to step up with its fresh financials. The pioneer of streaming video on TV will offer up its first-quarter results shortly after Thursday's market close.
Media stocks in general have been sinking since Netflix (NFLX 0.19%) shocked the world with a sequential decline in streaming accounts worldwide. Will Roku buck the trend? The stock has plummeted 81% since peaking last summer through Tuesday's close. Roku opened lower on Wednesday following an analyst lowering his price target and news that a pair of cable giants were joining forces to launch a rival to Roku's operating system for smart TVs.
There's a lot going on heading into a critical report for Roku. Let's break things down.
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Comcast (CMCSA 0.24%) and Charter (CHTR 1.47%) announced on Wednesday that they are forming a joint venture -- owned equally by both cable TV and broadband providers -- to develop a streaming platform that it will make available through branded streaming devices and smart TVs.
Any news of a potential competitor is problematic, but this feels like something we've binged on before. Charter is investing $900 million in the venture that will be based on Comcast's Xfinity Flex. If the name rings a bell for Roku investors, the stock took a hit three years ago when Xfinity Flex was introduced. Would Roku, with 30.5 million accounts at the time, be doomed?
You already know the answer. Roku's audience has more than doubled to top 60 million active accounts. Revenue has more than tripled, as average revenue per user at Roku has surged in that time. Fast-growing and higher-margin platform revenue has more than offset lower prices on the hardware front. Charter and Comcast in a 50-50 joint venture is a bigger threat than either cord-cutting casualty on its own, but Roku doesn't have to worry. It already competes against three of the four most valuable companies by market cap, and it's still the lead horse in this expanding field.
The other pressure point on Wednesday is Bank of America analyst Ruplu Bhattacharya lowering his price target on Roku stock from $235 to $145. He's also lowering his revenue forecast given the supply chain constraints that Roku discussed in its previous earnings call as well as indications that ad spending is weakening. This isn't good news, but Bhattacharya is still bullish on the stock. His new price target is still a healthy 58% gain from Tuesday's close.
Roku obviously has a lot to prove with Thursday afternoon's report, and an analyst hosing down his outlook the day before the report isn't comforting. However, Roku seems built for the new normal. Netflix imploding may actually be a good thing, especially if that makes it an active advertiser on the platform to promote its flagship service as well as potential gaming and ad-based plans. The Netflix news could also make rivals ramp up their marketing. Did you see how CNN+ was dismantled after less than a month? Desperate media companies with deep pockets will be quick to reach Roku's engaged audience of more than 60 million homes.
This isn't a company that's fading away the same way its share price appears to be doing. Its active base of viewers has widened by 17% over the past four quarters. Ad revenue per user has climbed 43% on top of that over the past year. With a cash-rich balance sheet and a dominant market position, it seems ready for its close-up this week. There seems to be more upside than downside at current levels.
