Roku (ROKU 5.65%) can't seem to do anything to catch Wall Street's eye these days. The pioneer of streaming video on TVs began the year by announcing strong sequential growth in active users in the fourth quarter and a brazen but risky plan to start producing its own smart TVs.
With earnings season just getting started, analysts are making moves ahead of the upcoming reports. Many recent market calls are upgrading popular stocks or boosting price targets, including that of the company behind the leading premium video service. But Roku hasn't been as fortunate. Wall Street's going the other way with the stock, and it could be a big mistake.
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Unpleasant streams
Roku got a rough start in this holiday-abridged trading week. Matthew Thornton at Truist is downgrading the stock from buy to hold on Tuesday. Despite a stock price that is down nearly 90% from its all-time high in the summer of 2021, Thornton feels that the valuation is still difficult to justify given the high operating expenses and mounting losses. He is slashing his price target on the shares from $90 to $50.
Things could be worse -- and they were late last week, when it was Jefferies analyst Andrew Uerkwitz downgrading Roku to underperform, lowering his price goal on the stock from $45 to $30.
The digital advertising trend is decelerating as advertisers brace for an economic slowdown, and the once-red-hot market for connected-TV ads won't be immune to the malaise. It could be even worse for streaming video, since the two largest streaming platforms rolled out ad-supported tiers during the fourth quarter. Because Roku is a free service that relies almost entirely on ad revenue to monetize its model and subsidize its hardware, seeing premium advertisers prioritize the two new pay services could leave a mark on the business.
We know that Roku's fourth-quarter financial results will be bad when it reports them in mid-February. You just have to sift through the positives to see where the stumbling will happen, since Roku itself is more popular than ever. Its base of active users has grown by at least 16% over the past year, and it served up a record number of streaming hours in the fourth quarter.
The problem here is that Roku's own guidance back in October called for an 8% decline in revenue. If its audience and usage are up 16% and 23%, respectively, in that time, why is the top line going the wrong way?
Ad revenue -- and, therefore, average revenue per user -- is likely to fall sharply after years of sequential upticks. We could also see a big drop in dongle sales. And it's fair to say that the fundamentals might have continued to sour in the three months since Roku scared investors with its problematic guidance.
This is a bad look, but it's not the only look. Long-term investors can focus on the encouraging attraction and engagement metrics. There are roughly 10 million more active Roku homes today than there were a year ago. And instead of streaming less as pandemic fears have eased, we're actually streaming more, with usage outpacing the active accounts growth. The connected-TV ad market won't stay down for long, even after absorbing the two new premium ad-supported outlets for marketers.
Wall Street is bracing for a rough report out of the company that ushered in the era of streaming video stocks. The Street wants everyone to know where they stand ahead of another shoe dropping for a millipede like Roku. The challenges are real, but if Roku can rein in its operating expenses and weather the slowdown of the advertising market, it will be well served by its widening audience when this storm abates.
