The back half of 2022 and most of 2023 have been pretty tumultuous for corporations. While investors may be distracted by the myriad challenges facing businesses of all sizes due to the hype around artificial intelligence (AI) and the possibility of a new bull market, make no mistake -- challenges still linger.
The S&P 500 index and Nasdaq Composite Index are up over 10% and 25%, respectively, so far in 2023. However, investors should keep in mind that the rising demand for generative AI and machine learning are not the only catalysts pushing equities higher. Several companies, especially in Big Tech, resorted to layoffs in an effort to curb bloated expense profiles and return to a path of profitability, while for some, revenue growth has slowed.
To put it bluntly, layoffs are an unfortunate component of organizational structure. From time to time, companies hire too quickly or pursue initiatives that are well beyond the core pillars of the business. If these investments do not contribute to some form of top-line growth, a business may be forced to make some difficult decisions.
One of the most recent high-profile companies making a cost-reduction effort is streaming platform Roku (ROKU -10.29%). Since its initial public offering in September 2017, Roku stock has returned over 190%. However, after reaching stratospheric trading levels during the summer of 2021, Roku stock has returned to orbit.
If you bought Roku stock during the last three years, there have been some lucrative trading windows. But at the same time, these pockets have been short-lived. Given its extreme volatility, is Roku really investable? Let's dig into what the company is doing and determine if its current trajectory makes it a compelling long-term buy.
The cost reduction details
Earlier this month, Roku disclosed the details of a cost reduction initiative in a regulatory filing with the Securities and Exchange Commission (SEC). Per the details, the company aims to decrease its expense profile by restructuring office space leases, reviewing its streaming portfolio, terminating vendor expenses, and reducing headcount by 10%.
Similar to its cohorts, Roku expects to book a number of impairment and restructuring charges related to these efforts. Severance and benefits costs from the headcount reductions are estimated to be in the range of $45 million to $65 million. On top of that, the company expects additional charges of up to $265 million related to the removal of some licensed content from its streaming catalog as well as costs incurred from office space lease termination.
While the impairment charges related to office space and licensed content look hefty, investors should realize that the actual cash outflow that Roku may experience will likely be much different than these figures. Impairment charges are important line items for GAAP financials but do not necessarily equate to actual cash leaving the balance sheet.
Image source: Getty Images
Is this enough to buy the stock?
The streaming landscape is filled with loads of competitors. While Netflix may be the industry leader, Big Tech firms such as Apple, Amazon, and Alphabet have all entered the realm and are aggressively pursuing market share. Moreover, traditional media and entertainment companies such as Walt Disney have struggled mightily to compete in a meaningful way.
ROKU Cash and Equivalents (Quarterly) data by YCharts
Purely from a balance sheet perspective, Roku doesn't carry anywhere near the dry powder (i.e. cash) that its competition does. Furthermore, the majority of the names in the chart above are investing in new content, not restructuring existing content.
I do not believe that Roku is a broken operation, per se. However, the cost reduction efforts, while necessary, seem to be too little, too late. Most of Big Tech is emerging from several rounds of layoffs and trimming expenses. Moreover, given the return to growing cash flow and profits, many of these companies can now begin investing carefully in future operations.
From my perspective, Roku still has a lot to prove before it makes sense as a long-term investment. There will likely be opportunities where money can be made when momentum traders enter. But these opportunities will be fleeting and, candidly, pretty risky. For now, Roku may not be an ideal candidate for long-term investors seeking consistent growth.
