Earlier this week, I called Roku's (ROKU -10.29%) fourth-quarter report a "potentially game-changing business update." I also highlighted the company's impressive growth prospects as a leading provider of viewing platforms for digital media streams. Picking up Roku shares this week would deliver rich rewards over the next three years and beyond, I suggested.
Well, the report is in and Roku suddenly looks even cheaper. The company appears to be humming on every cylinder, but market makers still slashed its stock price by 14% in Thursday's after-hours session.
I'll walk you through the report, including Roku's forward-looking guidance, so you can see for yourself how healthy the business looks. Feel free to do your own research, but don't be surprised to find this sudden price drop looking like a wide-open buying window.
Image source: Getty Images.
Roku by the numbers
Let's start with the headline figures.
Roku's fourth-quarter sales rose 14% year over year to $984 million. An aggressive cost-cutting program reduced operating expenses by 12%. Net losses shrank from $1.70 to $0.55 per share, while free cash flows and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) swung from negative to positive numbers.
For every metric where Roku's management provided fourth-quarter guidance three months ago, Roku exceeded its own expectations. Your average Wall Street analyst nailed the bottom-line result but stopped $18 million short of the reported revenue.
Let's not forget about the all-important user metrics. Roku added 10 million net new active user accounts over the last year, including 4.2 million names in the fourth quarter alone. That's a 14% annual increase, landing at 80 million active accounts. The number of streaming hours rose even faster, clocking in at a 21% jump. The effort to build a massive user base looks effective, and should support robust cash profits as the company refocuses on profitability later on.
And Roku's guidance wasn't exactly gloomy, either. The company promised to improve revenue and free cash flow, seeking positive bottom-line profits "over time." The macro environment remains unstable and the digital advertising market continued its bumpy recovery. However, sales should rise roughly 20% year over year to approximately $850 million, comfortably ahead of the current analyst consensus at $834 million.
Going beyond the raw data
Yes, the market commentary could have been more bullish, as the important category of ad buyers for the media and entertainment (M&E) sector are holding back their marketing budgets in early 2024, too. But that's a minor quibble in a generally bullish earnings report.
Roku is turning an EBITDA profit a full year ahead of schedule, despite a challenging economy and an incomplete rebound in the digital advertising business.
The price drop might make sense in light of Roku's recent price gains -- just before the plunge, the stock was up 83% from the 52-week lows of May 2023. But even that idea is a stretch. Roku's stock also closed Thursday's trading 80% below the all-time highs from the summer of 2021. The price-to-sales (P/S) ratio was a modest 4 times trailing revenue. Many growth-oriented companies see their stock trading at double-digit P/S ratios.
And another quarter or two with slow M&E ad sales isn't the end of the world. This marketing sector's recovery may be delayed, but only temporarily. Moreover, Roku is finding creative ways to repurpose the ad space it normally would reserve for M&E clients.
"We're taking a lot of inventory and creating new inventory that we used to sell explicitly for M&E, and we're using it now for brand advertisers," CEO Anthony Wood said on the earnings call. "We're increasing the number of advertisers we will give access to that inventory." Examples of this formerly exclusive M&E space include the Roku City screensaver and the media-viewing platform's home screen, where users decide which streaming service to watch.
In my view, Roku didn't deserve this sharp price cut at all. If anything, the company underscored its dominant market position and proved its worth to patient investors. Taking profits off the table looks like a very bad idea at this point, since Roku remains poised for profitable long-term growth in the explosive media-streaming sector.
In the long haul, Wood expects essentially all media-viewing and advertising to go digital, and he is positioning his company to take full advantage of this unstoppable cord-cutting trend. And I think that's exactly the right approach.
