What happened
Roku (ROKU -1.39%) was outpacing the market early Tuesday, with shares up by 5% as of 11 a.m. ET compared to a 1% boost in the S&P 500.
The rally in the wider market played a key role in driving the streaming video company's stock price spike. But Roku also announced some positive news about its hardware lineup.
So what
In a press release, Roku revealed that it is launching its premium streaming player, called Ultra, in the Canadian market. The hardware segment has been a major drag on its business lately. As management noted in late July, after an early pandemic surge, demand for streaming devices has fallen. Additionally, its manufacturing costs have risen more quickly than the company could raise its prices. These factors contributed to Roku's gross profit margin falling in Q2 from 65% of sales to 59% of sales.
Tuesday's news doesn't imply an end to that drag on profitability. However, Roku's focus on high-definition 4K products will help. And the device's $130 retail price could strike the right balance between supporting demand and boosting profitability. Roku's shares are down over 70% so far in 2022, in any case, so even modest improvements to its hardware outlook might lift the stock.
Now what
Investors will be watching Roku's next quarterly report, due in early November, to see how it is responding to the two biggest drags on its business. The hardware slowdown is one, but that could become less intense as Roku raises its device prices. The other main issue is that demand for advertising on its platform is declining.
Roku's earnings power is stronger when ad rates are rising and consumers are enthusiastically purchasing new streaming devices and spending time viewing content via its platform. But its diverse revenue model will still allow Roku to grow even if parts of its business stumble. That's why investors might consider putting this stock on their watch lists ahead of the company's likely return to profitability and expanding profit margins.
