The last few days have been a wild ride in the stock market. At the end of last week, SVB Financial, one of the nation's largest financial institutions, faced a sudden liquidity crunch. During its earnings call, investors were caught off-guard when the company announced that it was seeking to raise additional capital.
Subsequently, businesses and individuals who held funds at Silicon Valley Bank began to request withdrawals. This spiraled into a metaphorical contagion, and seemingly overnight Silicon Valley Bank was hit with a bank run.
So, what does this have to do with Roku (ROKU -10.29%)? Well, SVB Financial has become the de facto bank of choice for, you guess it, technology companies in Silicon Valley. Following the bank run, Roku announced that the company held roughly a quarter of its cash with SVB Financial.
As of December 2022, Roku held $1.9 billion in total cash and cash equivalents on its balance sheet. Therefore, using known data, it is likely that Roku had over $480 million of cash at SVB Financial.
Digesting the big picture
Trying to find a silver lining in this situation can prove challenging. Over the weekend, the federal government worked tirelessly to best figure out how to handle the ensuing bank run. The Federal Deposit Insurance Corporation (FDIC) effectively took control of SVB Financial and formed a resolution. The FDIC was formed to broker the sale of bank assets in an effort to make depositors whole during the event of a bank liquidation.
Per the Federal Reserve's website:
After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
The key word from the Federal Reserve's statement is "unsecured." As pointed out above, Roku held almost half-a-billion in cash with SVB Financial. According to Roku's latest 8-K filing, "The Company's deposits with SVB are largely uninsured. At this time, the Company does not know to what extent the Company will be able to recover its cash on deposit at SVB."
This disclosure certainly isn't a portrait of positivity. However, there is a major distinction between the Federal Reserve's statement and that of Roku's. Namely, the words "unsecured" and "uninsured" refer to two different concepts. The term "unsecured" is used when referring to debt instruments. Simply put, unsecured loans are not guaranteed or backed by anything.
In the case of Roku, the company is talking about uninsured cash deposits, not debt obligations. Nonetheless, shareholders of Roku stock obviously were spooked, as the stock dropped roughly 10% on the day of this filing.
Image source: Getty Images.
What happens from here?
According to the final statement from Roku's 8-K:
Notwithstanding the closure of SVB, the Company continues to believe that its existing cash and cash-equivalents balance and cash flow from operations will be sufficient to meet its working capital, capital expenditures, and material cash requirements from known contractual obligations for the next twelve months and beyond.
Although this may provide comfort for some, it could also be viewed as a way to curtail any fears that the company will struggle to meet debt obligations or be unable to invest in growth. Speaking of debt, investors learned during the company's fourth-quarter earnings call that the company was planning to retire its outstanding debt balance of $80 million in February.
At the time, an $80 million loan payment appeared more than feasible given the company's cash balance at the end of December. However, when news regarding SVB broke, a natural assumption would be that Roku's cash would actually now be hit by approximately $600 million -- $487 million held at SVB and the $80 million debt repayment. To make matters even worse, Roku burned nearly $500 million during 2022.
For current shareholders, last Friday was likely quite scary. The prospects of losing uninsured funds, coupled with high operating expenses, could certainly be enough to inspire panic in casual investors.
Is there an investment case?
Let's get this out of the way: In my opinion, it would be irresponsible and inappropriate to recommend Roku as a buy-the-dip opportunity right now. Stated differently, if Roku had reported solid earnings, but the stock dipped for some reason, then fundamentally speaking, perhaps it would be an opportunity to lower your cost basis.
The reality is that this entire situation came out of left field, caught investors off-guard, and resulted in a sell-off. Although the stock is rebounding, it would be extremely risky to buy some shares and assume there will be upward momentum. Investors need to understand that this is an ongoing, developing situation. While the federal government has done what it can to ease the situation in real time, Roku hasn't issued any further filings or statements to allay people's fears.
Given the statement above from the Federal Reserve, the government is not planning to fund depositors by using the taxpayer. Rather, the FDIC will likely resolve the issue at hand using the money it collects from insurance dues from its participating banks.
At the very least, the federal government stated that depositors will have access to their funds. If Roku did not have access to this cash, it is highly likely that the stock would continue cratering. However, this is not the case. Since the announcement from the government, Roku stock is up about 3%.
But when it comes to determining whether or not Roku is a worthy investment, perhaps its 2023 outlook from the earnings call can shed some light. Management stated the following:
Importantly, we have been adjusting our operations and operating expense profile to better manage through the challenging macro environment. As a result, we expect operating expense YoY growth to significantly decline over the course of the year, from approximately 40% in Q1 (a 30-point sequential improvement from Q4 2022) to single-digit YoY growth by Q4 2023.
Although its commitment to tightening expenses is respectable corporate governance, it could be viewed as a non-starter. Many economists are talking about the potential for a recession, and Big Tech has resorted to layoffs en masse. Given that Roku is very much a growth stock, it's not the most bullish sign that the company is decreasing its ability to invest in new initiatives.
While the long-term secular trends of streaming appear bullish, the current outlook for Roku stock is a painful question mark. Given these factors, coupled with all of the hoopla from the last week around SVB, the most prudent action is probably to hold off any further buying of the stock.
