Is Roku broken?
The streaming company’s disappointing holiday forecast, coming ahead of new, cheaper ad-supported streaming packages from Netflix Inc.
and Walt Disney Co.
has added to what was already a woeful 2022 for Roku Inc.
The stock has plummeted nearly 80% so far this year, wiping away close to $24 billion in market value and leaving the company worth less than $8 billion. That has led to some downcast views on Roku’s future.
“The outlook is quite tough going forward for Roku and (being facetious) our view is that Roku is indeed Broku as a stock (and it remains to be seen if it is Broku as a company amidst all of these hurdles),” Pivotal Research analyst Jeffrey Wlodarczak wrote in a note to clients last week.
Roku, which sprang up within Netflix to develop technology that would make it easier to watch streaming content on television, was founded by the executive who invented the DVR, Anthony Wood. But after spinning Roku out into its own company and eventually going public, Wood and other company execs played down the hardware that Roku sells and instead pointed to potential growth in its platform, which welcomes all kinds of streaming services along with its own ad-supported free streaming service.
The ad-supported service is the biggest question now, as the premium streaming services also move into ads. That could pull advertisers away from Roku just as many companies are cutting back on marketing budgets amid economic uncertainty.
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That puts Roku between a rock and a hard place. As the macroeconomy continues to slow, heading toward an expected recession, advertisers appear to be spending on sure things and the biggest potential audiences. And what investors are seeing is that Roku is not among the first choices for the big ad buys.
Google saw a big slowdown in revenue, but even with ad revenue $2 billion below expectations in the third quarter, the company still had an overall revenue gain of 6%. (Analysts were also concerned about its high hiring costs.)
Wood, who is also Roku’s CEO, tried to differentiate Roku from larger streaming services this week, noting that its purpose-built operating system designed for TV gives it many fundamental advantages. Roku’s growth has helped it separate from its roots next door to Netflix in Los Gatos, Calif. In the third quarter, it added 2.3 million accounts, slightly surpassing Netflix’s 2 million adds in the same quarter after two consecutive quarters of declines.
Netflix, Disney and Hulu “have to convince people to keep paying a subscription fee every month. And they do that by producing a lot of originals,” Wood said. “Our business is different. Our business is, we build active accounts by licensing our TV OS, selling streaming players, and then we focus on engagement across the entire platform.”
But it was the company’s forecast for the normally robust fourth quarter that caused the most concerns.
Roku executives cited the ad downturn in the so-called scatter ad market, where ad buyers purchase advertising closer to the time it will air, as opposed to far in advance. Roku reminded analysts on its conference call that it had over $1 billion in upfront commitments this year already.
The holiday-season revenue outlook of $800 million was about $100 million short of analysts’ expectations. That forecast was doubly disappointing because it is an election year, which provides a big potential opportunity for political ads.
“[A]ll of this will fuel the skeptic fire that Roku is wasting tons of money on content (management denies this) all while losing share to other platforms (jury is out),” said Daniel Kurnos, a Benchmark Research analyst, in a note last week. “We find it hard to believe that Roku has this little value in the broader ecosystem, with some longer-term bright spots, but unless Roku is right about broader ad spend (not good for anyone) … shares will continue to struggle.”
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Roku could help its case by detailing its advertising revenue, which is not disclosed separately from its platform revenue. That would be a useful gauge of the company’s current woes, allowing investors to better value the company.
“When the company was riding high from mid-2000 to last year, investors were left in the dark, guessing as to what was underpinning such meteoric growth,” MoffettNathanson analysts wrote in a note. “The lack of disclosure allowed the stock to sustain momentum longer than it should have.”
Roku also still gets revenue from its money-losing Roku player devices, which it lists as a separate revenue line item. Last month, it entered the smart-home market with a doorbell video camera, lighting and a subscription plan that lets consumers view their home security video in the cloud and receive alerts on mobile devices.
“Similar to our TV streaming model, we plan to build scale with our devices and then monetize through smart home services, which we expect to become a very large market,” said Wood and outgoing Chief Financial Officer Steve Louden in their shareholder letter.
It’s tough to see Roku building a big business out of smart-home gadgets, though — it will go up against Big Tech players like Apple Inc.
and Google, and even those companies haven’t shown that business to be a big driver of revenue or profit. Pivotal’s Wlodarczak has “serious reservations” about Roku’s entry into the smart-home market, which he described as outside the company’s core competencies and very competitive. Another analyst on the call asked why Roku was getting into this crowded arena instead of spending more on attracting international subscribers and on its ad technology. Wood said on the call that he believes the smart home is a “natural extension of Roku’s ecosystem.”
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The one saving grace for Roku may be the possibility of an acquisition. The company has long been thought of as a strong candidate for an eight-figure acquisition from a Big Tech firm or other interested party. A Roku spokeswoman declined to comment on acquisition speculation.
With Roku’s market capitalization below $10 billion for the first time since the beginning of the pandemic, Wlodarczak speculated that now may be the time for Wood to sell.
But he added a caveat: “Buyers may be turned off by [Roku’s] relatively poor results/competitive outlook, and we do not believe management (which controls most of the vote) is interested in selling.” According to the company’s most recent 10K filing with the Securities and Exchange Commission, Roku does have a dual-class stock structure, and as of Dec. 31, 2021, Wood controlled a majority of the combined voting power of its Class A and Class B common stock, even though he only owns 12% of the shares outstanding.
Wood should seriously consider selling if he gets the right price. With its advertising business hitting headwinds and competitive issues from larger, more well-heeled tech rivals, one way for Roku to show investors a return soon would be to find a buyer. Otherwise, Wood will have to rethink some of his investments in new areas. Investors might not stick around to find out if those forays are worth it.