Roku Experiences Slump due to Guidance; Worth Considering Purchase on Price Drop?
Following a peak of over $470 per share in 2021, Roku's (ROKU -0.17%) stock subsequently lost over 90% of its value and has struggled to rekindle investor excitement. This struggle intensified last week after a significant stock plunge following the company's third-quarter results announcement.
The recent drop has resulted in a 25% year-to-date decrease in its shares. Let's delve deeper into the company's report to determine if this is a suitable buying opportunity or if investors should maintain their distance.
Decent quarter, pessimistic outlook
Contrary to market sentiment, Roku's third quarter was relatively strong. Revenue increased by 16% year-over-year to $1.06 billion, surpassing $1 billion for the first time and exceeding management's $1.01 billion forecast.
Roku attributed the growth to enhanced ad demand, improved home screen monetization, and more robust third-party platform integrations. The company reported robust growth in the political, retail, and CPG (consumer product goods) sectors, while the media and entertainment sectors remained underperforming.
Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) soared by 126% year-over-year to $98.2 million, significantly surpassing the projected $45 million.
However, Roku's adjusted EBITDA excludes stock-based compensation, which amounted to $100.1 million last quarter, eliminating the company's adjusted EBITDA profit altogether. This expense is the primary cause of Roku's ongoing quarterly operating losses.
Revenue from the platform increased by 15% to $908.2 million and added 1.9 million new user households during the quarter. This brought the total user households to 85.5 million, a 13% increase from the previous year.
Despite being known for its streaming devices, these devices mainly serve as a lure to draw users onto its platform, where Roku generates revenue in various ways. This includes earning a portion of subscription revenue or advertising slots for viewers, as well as advertising on its homepage or through its own streaming channel.
The average revenue per user (ARPU) remained static at $41.10 during the quarter. This metric has been stable since the end of 2021 at $41.03. However, platform gross margins improved by 610 basis points in the quarter, while platform gross profits rose by 30% to $498.1 million.
Device revenue increased by 23% to $154.0 million, although this equipment is sold at a loss, resulting in a negative gross profit of $11.7 million.
Roku also managed to lower operating expenses in the quarter by 28% year-over-year.
The company anticipates fourth-quarter revenue of $1.14 billion, representing a 16% growth rate. Management's forecast also includes predicted gross profit of $465 million and adjusted EBITDA of $30 million.
In comparison, its gross profit was $437.9 million during the same period last year, while it had an adjusted EBITDA of $47.4 million. Analysts had projected gross profit of $477 million and EBITDA of $36.2 million.
Management expects robust growth in 2025, despite some challenges such as lapping price increases and the absence of significant political advertising the following year. However, investors were disappointed that the company announced it would stop reporting household figures starting next year, including the number of streaming households and ARPU.
Time for the dip to buy?
While Roku continues to grow positively, there are issues investors should be aware of. The company has been unable to increase its ARPU since the end of 2021, and it will no longer report this metric moving forward.
Additionally, the company remains a heavy user of stock-based compensation, which is a genuine expense that reduces shareholder value and increases the share count. This will continue to weigh on the stock.
In 2025, the company will face a challenge without the heavy political ad spending associated with a major election year. Linear TV traditionally experiences a significant year-over-year decline after the election cycle, and there may be a similar trend in streaming advertisements.
The media and entertainment categories, which were once Roku's mainstay, are unlikely to return to their former glory days as the industry shifts its focus towards profitability instead of subscriber growth.
Roku is generally conservative with its guidance, meaning it may exceed its fourth-quarter projections. However, one must consider the 2025 guidance, given the company's conservative approach and the challenges outlined above. As such, I would recommend remaining on the sidelines for now.
In light of Roku's robust third-quarter performance, with a 16% revenue increase and surpassing the $1 billion mark for the first time, some investors might question whether this could be an opportunity for further investing in the company's stocks. However, the company's ongoing reliance on stock-based compensation, which eliminated its adjusted EBITDA profit, and the absence of significant political advertising in future years, could pose challenges and might warrant careful consideration before making an investment decision.
