Throughout the first half of 2022, no topic has been discussed more in the financial media than inflation. Unprecedented government stimulus to help individuals and businesses in the U.S. manage through the coronavirus pandemic, coupled with supply chains running well below full capacity, has resulted in surging prices across the economy. And companies are feeling the effects.
One such business, streaming specialist Roku (ROKU -2.39%), has been dealing with inflationary pressures in one key area. And this is partly why shares are down 76% over the past 12 months. Based on recent news, I suspect this trend will continue, making profitability seem like a far-off dream.
Let's take a look at what Roku shareholders need to know.
Hardware sales under threat
Over the past four quarters, Roku has posted a negative gross margin in its hardware segment. This part of the business, which sells media sticks and players that consumers can plug into their TVs, accounted for just 11.8% of overall revenue in Q1, down significantly from 63.6% five years ago in Q1 2017.
While it's a much smaller revenue source today, hardware sales have been hurt by inflation and supply chain disruptions. "We've got continued elevated pricing in terms of components, as well as some availability challenges and then the kind of shipping and logistics costs and delays there," CFO Steve Louden said on the Q1 earnings call.
Higher TV prices in the U.S. in the first quarter caused unit sales to come in below pre-pandemic 2019 levels. And even though Roku's player unit sales were higher than 2019 levels, they were still down 12% year over year.
Led by founder and CEO Anthony Wood, Roku's leadership team has made the decision not to pass higher input costs onto customers in the form of higher prices, instead opting to focus on trying to grow the account base, which stood at 61.3 million as of March 31. With the average revenue per user jumping 34% in the first quarter, the business can afford to insulate customers from higher prices.
Roku is set to report its Q2 financial results on Thursday, July 28, according to Corporate Event Data provided by Wall Street Horizon. During the first-quarter earnings call, executives mentioned that they expected Q2 sales to increase 25% year over year to $805 million, which is still sizable growth given the current macroeconomic environment.
Inflation is still persistent
The consumer price index, a key indicator of inflation in the U.S., was up 9.1% in the month of June over the trailing-12-month period. This clearly demonstrates that inflation is still raging, despite the Federal Reserve's attempts to slow it down by aggressively hiking interest rates. What this tells me is that Roku will continue to be negatively affected by the macroeconomic environment. As a result, investors shouldn't be surprised to see a negative gross margin for the player segment in the second quarter.
It's not all gloomy, however. If the company continues to grow its base of active accounts, as it has successfully done in recent quarters even with the fading effects of the coronavirus pandemic and a loss of subscribers at a major streaming service like Netflix, then shareholders should stay optimistic about Roku's prospects.
After all, it's about bringing in more users, which Roku can then monetize via its streaming platform with high-margin advertising and subscription fees. Selling media sticks at a loss is fine as long as the business is attracting more viewers. Over time, as inflation hopefully subsides and supply chains catch up to economic demand, Roku's chances of achieving sustainable profitability increase. And that would be a huge benefit to the stock.