It's showtime for the company behind the country's leading streaming hub. Roku (ROKU 1.58%) recently topped 70 million active accounts, but it may have some disappointing news to report when it delivers its fourth-quarter results shortly after Wednesday's market close.
It's the day after Valentine's Day, but Roku investors are used to bracing for bad dates. The stock may be beating market with a 36% year-to-date gain, but it's still trading 89% below the all-time high it hit two summers ago. The bar is low for Roku heading into this week's telltale financial report. It doesn't mean it can't nail this game of Wall Street limbo.
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Between a Roku and a heart place
Press releases out of Roku in recent weeks have been flattering. Every few days there's news of more content on The Roku Channel, already one of the five most-streamed apps on the platform. There was a clever marketing deal with DoorDash, where Roku users can engage with merchant ads that deliver through the delivery service by initiating the order with a remote control. A deal with Cox Automotive should boost the value and activity for car companies by more effectively targeting their marketing missives on Roku.
2023 also started with the real head turner that kicked off this year's rally. Roku announcing that it had more than 70 million active users on its platform in early January was huge. It was 5 million more accounts than it was serving three months earlier, and a better than 16% ascent from where it was at the start of 2022. The cherry on top? The 23.9 billion hours of content streamed through Roku -- roughly 3.7 hours a day per viewer -- was a 19% increase over the past year.
There were fears that hardware sales would be weak during the fourth quarter, but you obviously don't grow your base by at least 4.6 million active accounts sequentially without a lot of Roku dongles or Roku-backed smart TVs as holiday gifts. The only lever investors don't have a good handle on is ad revenue, and this is where Roku's trap door could swing wide open shortly after Wednesday's market close.
Roku issued guidance in late October calling for an 8% year-over-year decline in revenue for the fourth quarter it will discuss this week. Yes, a decline of 8%. Roku's audience base and platform usage are up 16% and 23% over the past year. Roku's installed base of users grew by more than 4.6 million during the fourth quarter, compared to a sequential gain of 3.7 million active accounts a year earlier.
If Roku comes anywhere close to its earlier guidance -- or even if it's somehow marginally positive -- it will have to come at the expense of ad revenue. This would be a first for Roku as a public company. Average revenue per user (essentially ad revenue per user) has moved higher with every passing quarter. It's the missing variable in the quarter's top-line equation. Even if the player hardware revenue slips because of lower average selling prices, it will likely be the swooning ad revenue that draws the most gasps.
Are you bracing for the cracks in Roku's advertising model? That's good, but there's another pressure point at the other end of the income statement. The once-profitable Roku has been posting widening deficits. It has posted a larger-than-expected loss in two of the last three quarters. The trend isn't your friend until it's the end of the trend, friend.
Analysts see Roku posting a loss of $1.73 a share. The red ink target has been inching deeper into the crimson in the past few weeks. Roku turned a profit in the prior year's fourth quarter, likely the last positive net income investors will see out of Roku for a while. As bad as 2022 was for Roku, Wall Street pros see the losses getting even bigger in 2023.
Turning average revenue per user around isn't difficult. The connected TV advertising market needs to recover, and Roku is making its own luck with partnerships like the ones it struck with Cox Automotive and DoorDash earlier this month to make advertisers pay more to get in front of that growing audience. Clawing its way back to profitability will be harder for the bellwether of streaming video stocks. All that good news about content coming to The Roku Channel doesn't come cheap, and the same can be said on the hardware end competing against cutthroat titans of tech. Its plan to put out its own TVs doesn't sound like a cheap date. Roku will have to program optimism into its banter as it discusses its ad revenue and widening losses. It risks investors turning the channel to watch something else if it doesn't soothe those two areas of weakness.
