Roku's (ROKU -8.73%) stock rose 11% on Feb. 16 after it posted its fourth-quarter report. The company -- which provides streaming devices and the software platform for them -- had revenue that stayed nearly flat year over year at $867 million but beat analysts' estimates by $64 million.
It posted a net loss of $237 million, compared to a net profit of $24 million a year ago. But its net loss of $1.70 per share still beat the consensus forecast by $0.03.
For the full year, Roku's revenue rose 13% to $3.1 billion, but its net loss of $498 million marked a steep decline from its net profit of $242 million in 2021. Those growth rates were dismal, and Roku's stock remains down more than 50% over the past 12 months after its recent post-earnings pop. Could it finally bottom out and recover by the end of this year?
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First, some good news...
Roku's growth accelerated during the pandemic as more people stayed at home and watched streaming video. But that growth spurt ended along with the lockdowns, as people spent more time outside again. And the company has faced a tough post-pandemic slowdown over the past two years.
But Roku's number of active accounts increased 16% year over year to 70 million in the fourth quarter, which matched its growth rate in the third quarter. Its total streaming hours also increased 23% to 23.9 billion, an acceleration from its 21% growth in the previous quarter.
During the fourth-quarter conference call, CEO Anthony Wood said that even though 2022 was a difficult year for the advertising market, Roku made excellent progress in building its "platform, brand, and industry leadership" and still had "unmatched" scale and engagement rates relative to its peers. Wood said that nearly half of all broadband households in the U.S. now use Roku OS, and that its software platform has now become the "No. 1-selling smart TV OS" across the U.S., Canada, and Mexico.
And now, a lot of bad news...
Roku's audience is still expanding, but its margins are crumbling. Its gross margin fell 190 basis points year over year to 42% in the fourth quarter. The gross margin of its platform business, which generates most of its revenue from the integrated ads on Roku OS, fell from 60.6% to 55.8% as macro headwinds curbed the growth of the advertising market.
The gross margin of Roku's device business -- its set-top boxes, streaming sticks, and smart TVs -- dropped from negative 26.4% to negative 32.1% as macroeconomic and competitive headwinds prevented it from passing along its higher supply chain costs. So Roku is selling its hardware devices at a loss to tether more viewers to its higher-margin platform business, but both segments' margins have been consistently compressed over the past year.
That ugly environment made it difficult for Roku to grow its average revenue per user (ARPU), which rose just 2% year over year (and declined 6% sequentially) to $41.68 in the fourth quarter. That anemic growth, which can be attributed to the soft advertising market, offset its growth in active accounts and caused its total revenue to stay flat.
That combination of decelerating sales growth and declining margins caused Roku to turn unprofitable in 2022. That slowdown won't end anytime soon: For the first quarter of 2023, it expects its revenue to dip 5% year over year to $700 million as its gross margin slides from 49.7% to 44.3%.
For the full year, analysts expect Roku's revenue to rise 4% to $3.27 billion as its net loss widens from $498 million to $746 million. Those widening losses are worrisome, since Roku's top competitors -- which include tech giants like Amazon, Apple, and Alphabet's Google -- can afford to operate their streaming ecosystems at losses to gain more viewers.
Roku will also need to ramp up its spending on the Roku Channel, its ad-supported streaming platform for original content, to remain competitive.
Where will Roku's stock be in a year?
The stock might seem cheap at less than three times this year's sales, but it trades at that discount because it hasn't proved that its business model is sustainable. It's still gaining more viewers, but it relies heavily on margin-crushing strategies (cheap streaming devices, the production of its own smart TVs, and the Roku Channel) to drive that growth.
Roku's prospects might brighten if the advertising market warms up again, but I believe its stock will remain stuck in neutral and broadly underperform the S&P 500 this year as investors question its ability to compete effectively against Apple, Amazon, Google, and others while stabilizing its margins over the long term.
