Like many consumer-facing stocks, Roku (ROKU +0.83%) continues to suffer from a lockdown-induced hangover. After delivering robust gains driven by pandemic restrictions, growth has been much harder to come by recently.
A one-two punch of tough comps and even tougher macroeconomic conditions have the streaming pioneer on the mat, down 83% compared to last year's high. When the company reported its third-quarter results, some investors changed the channel rather than stick around for the closing credits.
Roku's net revenue of $761 million grew 12% year over year, while swinging from a profit to a loss per share of $0.88. For context, analysts' consensus estimate called for revenue of $696.2 million and a loss per share of $1.29, so Roku cleared both bars with ease. However, there's a plot twist ahead. (More on that in a minute.)
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The news wasn't all bad, but it was clear that the macroeconomic headwinds had turned into a gale force wind for Roku. Platform revenue of $670 million grew just 15% year over year. Management noted that this was below the company's historical growth rate, citing the "macro environment."
This segment includes licensing of the Roku operating system to connected-TV manufacturers and digital advertising revenue from its streaming video platform. Marketers are quick to slash advertising budgets in the event of a downturn, which the company noted in its earnings release: "Advertising spend on our platform continues to grow more slowly ... due to current weakness in the overall TV ad market."
The player segment also suffered, as revenue of $91 million declined 7%. Roku noted that "supply chain costs remain elevated above pre-COVID levels."
A perfect storm
Wall Street detests change, and Roku's latest episode served up a major plot twist. The company announced that chief financial officer Steve Louden, who has been with the company since 2015 and helped lead its initial public offering, will be departing sometime in 2023. He originally planned to exit in 2019, but stuck around for a couple more seasons. Louden will help transition his successor, so this is business as usual.
Equally as distressing to investors was Roku's outlook. The company said it expects "the macro environment to further pressure consumer discretionary spend and degrade advertising budgets," which will continue to weigh on results. For the upcoming fourth quarter, management is guiding for net revenue of roughly $800 million, a decline of about 8% year over year, resulting in an adjusted EBITDA loss of $135 million. That's down from $55 million in the prior-year quarter.
The sheer scale of the company's declines sent a collective shiver through Wall Street, as the analysts' consensus estimate called for revenue of $899.3 million and a loss per share of $1.10.
Now what?
It's easy to be overwhelmed by the magnitude of the challenges ahead, but it pays for investors to take a closer look so they don't miss the forest for the trees. Selling at this point could be a costly mistake.
One contributing factor in Roku's sizable loss were moves made during the pandemic. The company noted that the significant growth in its year-over-year operating expenses was "largely the result of robust hiring ... [and] accelerating investments" to accommodate its rapid growth.
Roku has since slowed the rate of hiring and is cutting expenses in response to the macro conditions, but says "it will take a few more quarters for this ... growth rate to normalize."
Furthermore, the ongoing downturn is skewing the results, making the situation appear worse than it actually is. Consumers and businesses alike are reining in spending, which will weigh on Roku over the short term. That said, investors are best served if they reset their expectations to include the current environment, as the situation will turn quickly once the economy begins to rebound.
Then there are Roku's active accounts, which trudged higher to 65.4 million, up 16% year over year, which is an audience advertisers simply can't ignore. Sure, things are tight now, but change will come quickly, and Roku will be ready when it does.
And growth in digital advertising -- which accounts for the lion's share of the company's revenue -- might be stalled now, but that growth will rebound once conditions improve, and Roku is well positioned to reap the benefits when it does. Worldwide digital ad spending is expected to grow from $521 billion in 2021 to $876 billion in 2026, according to Statista. And as ad spending moves from traditional broadcast to ad-supported streaming, Roku will profit from that transition.
As the industry-leading streaming platform, Roku has advantages its competitors can't match. There are 10,000 channels to choose from on its service, including all the biggest free, ad-supported options and paid streaming services alike. Roku has always been service agnostic, casting a wide net to ensure viewers could find their favorite in-home entertainment choices.
Lastly, for those looking for a bargain, Roku stock is hard to beat, selling for just 2 times next year's sales, falling neatly within the definition of a reasonable price-to-sales ratio, which is between 1 and 2.
For investors with a long outlook, a little patience, and the stomach for volatility, Roku stock is a buy.
