Roku's Facing an Uphill Battle -- Here's Why
During a quarter in which Roku (NASDAQ: ROKU) increased its active accounts, streaming hours, and average revenue per user -- both sequentially and year over year -- there were some negative ongoing trends that shareholders might have missed.
Now, with the stock down over 60% in 2022, it's probably wise for investors to understand what exactly could be affecting the business. Let's take a closer look at two key challenges this top streaming stock is facing right now.
Near-term headwinds
One of the biggest topics in the financial media has centered on struggling supply chains. An unexpected boost in consumer demand following the depths of the coronavirus pandemic, coupled with tight logistics operations, resulted in unprepared supply chains across the global economy.
In Roku's case, this situation continues to affect the sale of its hardware devices, which represented 11.8% of the overall business in the first quarter. Over the past four quarters, management has made the decision not to pass higher input costs on to its customers in an effort to continue growing the base of active accounts. The result has been a negative gross margin of 17.4% in the first quarter for Roku's Player segment.
The leadership team thinks inflationary pressures and supply chain issues will continue to have an adverse effect in the near term. The good news for Roku, however, is that 88.2% of total revenue in Q1 came from the high-margin Platform segment, which includes lucrative subscription and advertising fees. Selling hardware at a loss for the time being is fine as long as the business keeps adding more users, something it has long been successful at doing.
Another possible problem Roku might face is decreased spending from advertisers, a threat exacerbated by a looming recession that could be spurred by the Federal Reserve's intention to hike interest rates aggressively this year. In Roku's 2021 fourth quarter shareholder letter, it was highlighted that ad spending from companies in the automotive and consumer packaged goods industries was showing softness. This can have a direct effect on Roku's ability to monetize its platform via advertising revenue.
Nonetheless, on April 28, management reiterated guidance for 35% year-over-year revenue growth in 2022. They have no doubt that the company will be able to navigate whatever is thrown its way.
Take a long-term approach
To be clear, I fully believe that these recent problems will prove to be temporary. For starters, these issues aren't unique to Roku's business. Anyone who has even casually been paying attention to the financial news understands that soaring inflation and challenged supply chains are things almost every company out there is trying to navigate. Even if they cause a recession, the central bank will curb rising prices across the economy, giving supply chains a chance to catch up.
And as far as advertising spending is concerned, more dollars are moving toward connected TV as traditional cable TV continues losing subscribers with each passing year. This is a long-term tailwind that should support Roku for many years.
The bigger picture that investors should keep in mind is the company's competitive positioning that will allow it to benefit from the growth of streaming entertainment over time. This makes the stock a compelling investment right now.
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Neil Patel has positions in Roku. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.
