Shares of Roku (ROKU -10.29%) fell in after-hours trading on Friday, March 10. Investors are more than a little nervous about the potential loss of $487 million in cash and cash equivalents the company had parked in Silicon Valley Bank (SVB).
Even before admitting its exposure to the collapse of SVB, Roku stock was down 87% from the peak it set all the way back in 2021. Should investors dump their shares now, or does it make more sense to hold on to the embattled streaming stock?
Here's what you should know.
What happened?
SVB, a subsidiary of SVB Financial Group (SIVB.Q), famously partners with American tech businesses. In the years leading up to the Federal Reserve's recent round of interest rate increases, investors showered tech start-ups with heaps of extra cash they deposited at SVB.
Once interest rates rose and cash stopped flowing so freely, SVB's customers started withdrawing their cash. SVB had parked its partners' deposits in long-term Treasury notes, as banks generally do. However, those assets lost a lot of value this time because the Federal Reserve rapidly raised its target rate.
On Wednesday, March 8, SVB told investors it had to sell all its available-for-sale securities to strengthen its deteriorating financial position. Just two days later, the state of California shut SVB down and appointed the Federal Deposit Insurance Corporation (FDIC) as its receiver.
What will happen to Roku's cash?
Roku said that $487 million of a cash balance totaling $1.9 billion is held at SVB. The rest is held at other large financial institutions.
Thanks to FDIC insurance, customers with $250,000 or less at SVB will be made whole by Monday morning. Roku and the rest of SVB's big depositors will receive an advance dividend for an unknown amount by the end of the week.
Further dividends to Roku could follow as the FDIC sells off SVB's remaining assets. However, just how much can be recovered is anybody's guess at the moment.
Can Roku handle more losses?
The past year has been a mixed bag for Roku. On the plus side, the number of active accounts rose 16% in 2022 to reach 70 million. Those accounts racked up 23.9 billion streaming hours in the fourth quarter, 23% more than the previous year period.
Roku account holders are happier than ever, but we can't say the same for the advertising industry. A potential recession has caused ad buyers to tighten their belts. As a result, average revenue per user rose just 2% year over year in the fourth quarter. Declining device sales caused fourth-quarter revenue to stagnate compared to the previous year's period.
While advertisers tightened their belts in 2022, Roku didn't. Fourth-quarter operating expenses soared 71% year over year, while revenue remained flat. Instead of the modest profit investors saw a year ago, operations lost a frightening $250 million in the fourth quarter. Over the past year, as revenue stagnated, the company reported a $498 million net loss.
ROKU Revenue (TTM) data by YCharts. TTM = trailing 12 months.
Last November, Roku laid off around 5% of its staff, but that might not be enough. The company forecasted another net loss of $205 million in the first quarter of this year.
Hold for now
Roku's recent losses are even more troubling now that we have to worry about the company losing a large chunk of its cash cushion. That said, selling the stock right now probably isn't the right move. Despite SVB's demise, Roku believes it has enough cash to get through at least the next 12 months. In the meantime, its platform will most likely become even more valuable to advertisers.
In North America, Roku is the leading TV platform by hours streamed, and it's growing fast. Total streaming hours have more than tripled over the past five years.
The world's biggest advertisers cherish the brand safety they can expect from the premium programming Roku provides. With the leading platform found on connected televisions, the company's best days are most likely ahead. This might not be a great time to start a new position, but I wouldn't be in a hurry to let go of this stock, either.
