Coming into Thursday afternoon's earnings report, Roku (ROKU -10.29%) appeared to be making a comeback. After plunging more than 90% from its pandemic peak, Roku's share price had more than doubled from its bear market bottom as revenue growth has accelerated and the company benefited from lower costs after multiple rounds of layoffs.
However, the leading streaming distribution platform's fourth-quarter report left investors unimpressed, and the stock has fallen over 20% as of this writing.
Roku's actual numbers for the period mostly met expectations, but management's guidance was weak in some key metrics, and the report indicated the company's recovery, and that of the ad market, would be uneven.
Fourth-quarter revenue increased 14% year over year to $984.4 million, which topped the analysts' consensus estimate of $968.2 million. Active accounts rose 14%, and streaming hours increased 21%, bringing the total for the year to more than 100 billion hours. While usage trends were solid, the company cited weakness in the media and entertainment industry and an uneven recovery in the ad market as headwinds to growth.
Media and entertainment, which includes its streaming partners, has traditionally been one of Roku's strongest verticals, as it makes sense for streaming services to advertise on a streaming platform. However, growth in that category has slowed as the industry right-sizes and streaming services cut back on marketing spending.
On the bottom line, the company reported a generally accepted accounting principles (GAAP) loss of $78.3 million, or $0.55 per share, which matched estimates.
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Guidance comes up short
Management is guiding for first-quarter revenue of $850 million, which would equate to 20% growth. That came in above the analyst consensus estimate of $833.6 million.
However, Roku's gross profit forecast of $370 million was just shy of the $373.4 million analyst estimate. The company also predicted it would break even on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), compared to its profit of $47.7 million in the fourth quarter.
Management cited a "challenging macro environment and uneven ad market recovery" in its guidance, and it also sounded a cautious note on its full-year growth outlook, saying, "We will face a difficult year-over-year growth rate comparison in streaming services distribution and a challenging M&E (media and entertainment) environment for the rest of the year." In other words, it expects slow growth in streaming subscriptions and advertising from its streaming partners.
Though it reached its goal of generating positive adjusted EBITDA a year early in 2023, the company didn't offer a specific goal for 2024, saying only, "We plan to increase revenue and free cash flow and achieve profitability over time." It's also still unprofitable on a GAAP basis and doesn't seem close to getting out of the red.
What's next for Roku
The fourth-quarter update and guidance seem to indicate that Roku's path to profitability is going to take longer than previously expected, due in part to weakness in media and entertainment spending.
However, Roku still looks like it's well positioned to benefit from the long-term shift of advertising revenue from linear TV to streaming. For example, the company said streaming made up more than 60% of TV time for U.S. adults aged 18 to 49, but advertisers spent only 29% of their TV budgets on streaming.
That disparity should resolve itself over time as most major streaming services have introduced ad-supported tiers, and based on Netflix's quarterly reports, they're seeing strong growth.
Roku's own user base is also experiencing solid growth. Additionally, the company is adding new product partners and expanding its geographical and retail reach.
The company should be able to capitalize on the opportunities in front of it, but investors' expectations have increased as the stock has rebounded. Roku will need to sustain its accelerating growth and take steps toward achieving profitability in order to deliver for investors.
The pieces are there for the streaming stock to achieve that. Investors may just have to be a little more patient right now.
