Roku (ROKU -10.29%) reported first-quarter 2022 results after the markets closed on April 28. Once buoyed by the pandemic, the streaming content enabler is now seeing the effects of the outbreak turn into a headwind.
Labor shortages are decreasing economic output and, combined with robust consumer demand, are pushing the cost of its player equipment higher. Roku management has decided to absorb those higher costs rather than pass them along to customers, resulting in a gross loss in its player segment.
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Roku is sticking with strategy of absorbing higher costs
Note that Roku disaggregates revenue and gross profit figures into two segments: platform and player. The latter segment includes sales of its physical units that connect to TVs, giving users access to the Roku platform. Roku is willing to sell these units without a profit, or even a slight loss, because it brings customers to its platform segment.
Unlike its player segment, Roku's platform segment generates robust profit. In its most recent quarter, which ended March 31, that segment delivered $649.6 million in revenue and $379.9 million in gross profit. Those were increases of 39% and 22%, respectively, from the same quarter last year. So Roku can afford to absorb losses to keep prices low on its players.
ROKU Gross Profit (Quarterly) data by YCharts.
That said, the losses are adding up. In the quarter ended in March, Roku's player segment reported a gross loss of $15.1 million. That was the fourth consecutive quarter it has generated a gross loss in unit sales. What's worse, management expects the pain to continue to the second quarter. Amid supply chains disruptions and rampant inflation, there is no telling when the price pressures will ease. Over those four quarters, Roku has lost over $80 million on sales of its players.
What this could mean for Roku investors
The cost headwinds could partly explain why Roku's stock has plunged 78% off its high. Adding to the selling pressure is a market that is falling out of love with unprofitable growth stocks.
Even so, the company's more profitable platform segment grew by 38% year over year, and total hours of engagement are higher than last year, when folks were staying home more often.
ROKU PS Ratio data by YCharts.
Moreover, the company told investors it expects to grow revenue by 25% in Q2 and 35% for the entire year in 2022. Investors are taking comfort in the fact that the headwinds are short term and will likely resolve as the world progresses in the battle against COVID-19.
Meanwhile, the switch to streaming content instead of watching through a cable connection is probably long-lasting as the advantages of streaming are too much for cable to overcome.
And since Roku's stock has fallen considerably, its valuation has become more favorable. Nevertheless, investors can expect volatility to continue in the near term, so long as supply shortages constrain output and raise costs.
