Roku's (ROKU -2.62%) financial performance was nothing to write home about in the second quarter. The streaming platform business disappointed Wall Street forecasts for both revenue and earnings per share. The stock tanked 25% following the news, and it's down 71% so far in 2022.
The rest of the year will continue to be a difficult operating environment for Roku, according to the management team. But that also spells opportunity. Investors should take advantage of the weakness surrounding the streaming stock right now and buy the dip.
Near-term headwinds
During Q2, Roku's Player segment, which includes the sale of its media hardware, reported a gross loss of $22 million, marking the fifth straight quarter of a negative gross margin in this division. This simply means that the business is losing money on every sale.
Ongoing supply chain issues and inflationary pressures have pushed up input costs, but the leadership team has decided not to raise prices on consumers, instead focusing on growing the user base. In the second quarter, Roku was able to increase active accounts 14% year over year to 63.1 million.
Further, a weakening macroeconomic environment is leading to lower consumer discretionary spending, including for Roku's branded TVs and media players. Unit sales were lower than in Q2 2021, making it even more difficult to bring on new accounts.
To make matters worse, the digital advertising market is slowing considerably in the face of a potential recession. Roku's platform revenue, which includes high-margin ad sales, increased 26% year over year. "This growth was lower than expected as many marketers abruptly curtailed or paused advertising spending," CEO Anthony Wood explained in the most recent shareholder letter.
As a result of these ongoing issues, Roku's business and its stock could face continued pressure for the rest of 2022. In fact, management now expects third-quarter revenue to be $700 million, 22% below the $902 million Wall Street was expecting. What's more, the executive team withdrew guidance for the full year, citing the "uncertainties and volatility in the macro environment."
Long-term tailwinds
Despite the problems facing Roku right now, the company's long-term prospects continue to look bright. The business benefits from the cord-cutting trend. eMarketer estimates that in 2026, there will be 57.2 million households in the U.S. that still have a traditional cable-TV subscription, compared to 68.5 million this year. And you can be sure that more households will find themselves on Roku's platform as Roku has the top-selling smart-TV operating system in the U.S.
The continuous drop in domestic cable-TV households has, unsurprisingly, coincided with the increasing popularity of streaming entertainment. According to data provided by Nielsen, hours spent streaming television in the U.S. have exceeded hours spent watching cable TV for the first time ever. To be clear, this could reverse itself in the fall as the football season gets in full swing, but the secular shift toward streaming can't be denied.
Then there's the transition of both small and large corporations moving their marketing dollars from linear TV to connected TV, where Roku has a strong position. Advertisers who choose this route are better able to target their audiences and receive a greater return on marketing investment. And again, as the eyeballs move to streaming, the ad dollars will continue to follow.
I think the best course of action for investors is to dollar-cost average into Roku, buying a small amount of the stock once a month throughout the course of the year until a full position is attained. And prepare for the negative sentiment to continue in the near term as the economy starts to slow. But the company's outlook remains strong, so shareholders who stay focused on the next five years (or more) could be handsomely rewarded.
