By most measures, it was a good fourth quarter. Roku's (ROKU -10.29%) revenue grew 14% year over year to $984.4 million during the period, topping analysts' consensus estimate of $968.2 million and setting a company record. A record-breaking 80 million people used a Roku device in Q4, and the total amount of video people watched using Roku devices hit a new high too. And, after culling its operating expenses, the company's adjusted EBITDA further improved after swinging back into positive territory just a quarter earlier.
Admittedly, its loss of $0.55 per share was a bit more than the $0.52 per share loss analysts had been modeling for, but it's difficult to predict losses from companies that are more focused on growth than on profits. That category includes Roku, to be sure.
Yet following Thursday's release of those overall solid fourth-quarter numbers, Roku shares tanked.
There were three key reasons for that tumble, and the overarching problem is that all three could linger into the foreseeable future.
1. Average revenue per user slumped
No two quarters are ever going to be identical. But Roku's average revenue per user of $39.92 in Q4 was down quite a bit from Q3's $41.03. This measure of the company's marketing firepower has been generally dwindling since late 2022.
Data source: Roku. Chart by author.
There are some footnotes to add to this figure. Chief among them is the industry environment -- it's not great. "We will face difficult [year-over-year] growth rate comparisons in streaming services distribution and a challenging M&E (media & entertainment) environment for the rest of the year," Roku's leadership said in the fourth-quarter press release. Fortunately, this kind of dynamic is often cyclical.
Unfortunately, though, these weakening average revenue per user numbers could just as easily point to deteriorating pricing power, stiffer competition, and even waning interest in streaming content. A 2023 poll by Civic Science suggests 62% of U.S. consumers are simply overwhelmed by too many streaming choices, while Hub Research reports that -- for the first time ever -- the average number of television content sources U.S. consumers regularly used actually fell last year.
2. Roku's revenue growth is slowing down
In some ways, it's not entirely fair. The bigger a company gets, the tougher the comparisons to its past success become on a percentage basis. Maintaining historical percentage-growth rates requires bigger and bigger absolute growth.
Even allowing for such a mathematical slowdown though, the company's progress is slowing on some fronts. Namely, overall revenue and platform revenue growth are losing steam.
Image source: Roku Q4-2023 shareholder letter.
That's far from being a catastrophic issue. Again, much of the slowdown can be attributed to how the math is done. The market saturation that's working against the company's total sales and average revenue per user is also beyond Roku's control and arguably could have been expected by the market.
The circumstances behind the slowdown aren't part of the equation for investors, however. It's the results that are being achieved (or not achieved) that drive a stock's price higher or lower. Many of Roku's key metrics show that a headwind has already formed. Investors hadn't really seen this yet, and now that they have, they seem to be a little shell-shocked.
3. Roku's changing capital structure is chipping away at shareholder value
Last but not least, Roku is diluting its existing shareholders and taking on more debt -- both of which work against shareholder value -- in the name of growth.
It's not unheard of for young companies to issue stock to employees as part of their compensation package. Indeed, in many cases, workers accept below-average salaries in exchange for shares in fast-growing organizations. If these companies aren't careful, though, this method for incentivizing employees can soon get relatively expensive. That's especially true when the young company in question isn't yet profitable and every penny counts -- as is the case with Roku. It should be noted that the cost of its stock-based compensation has been the difference between positive and negative EBITDA for the past several quarters.
ROKU Shares Outstanding data by YCharts.
Liabilities are inching higher, too, while total assets were down year over year in 2023 -- both by a couple of hundred million dollars.
It's too soon to say Roku's stock-based compensation is going to prove ruinous; maybe it will eventually be worth it. These nickels and dimes add up in the meantime, though. That's going to be particularly problematic if the company has to ramp up its sales and marketing spending again to rekindle growth and engagement.
Investors have much to think about
Don't panic if you already own Roku shares. There are some bright spots in last quarter's numbers. If nothing else, overall revenue continues to grow at a strong pace even if per-user revenue is slumping. Operating cash flow and free cash flow also both turned positive last year. That's something to build on.
But this is also an unprofitable company that many investors anticipated would become a smashing success at some point in the future. Now, that eventual success is in question. The market's not accustomed to digesting such doubts about Roku -- the stock's post-earnings tumble says as much. The problem is, more red flags in future quarterly reports may well have a similar effect on its shares.
Bottom line? There's little point in bailing out of the stock immediately after the steep sell-off. If you do want out, maybe at least shop around for a better exit price. And if you decide to stick with the stock, just understand the full risk here and prepare for similar volatility ahead. If you were mulling a new position in Roku specifically because of the pullback though, think carefully before taking that plunge. A handful of serious concerns are now surfacing. There are plenty of lower-risk alternatives out there with just as much upside.
