A disappointing forecast and weak advertising revenues spooked investors.

Roku continues to suffer from lockdown-induced hangovers, like many consumer-facing companies. The recent slowdown has been attributed to a range of factors, including pandemic restrictions that led to robust gains in the previous year.

The streaming giant Netflix is down 83% compared to its high last year, hit by fierce competition and harsh macroeconomic conditions. A few investors switched channels before the closing credits were announced during the company’s third-quarter report.

As a result, Roku posted a loss per share of $0.88, which was an increase of 12% year over year. Roku easily exceeded both targets, generating revenue of $696.2 million and a loss per share of $1.29 based on analysts’ consensus estimates. The plot twist, however, is just around the corner.

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However, it was clear that Roku was facing a gale-force wind due to macroeconomic headwinds. Over the past year, platform revenue has grown just 15% to $670 million. Managing directors cited the “macro environment” as a reason for the lower growth rate than usual.

The Roku operating system is licensed to connected-TV manufacturers and the streaming video platform generates digital advertising revenue. According to the company’s earnings release, marketers tend to cut advertising budgets in times of downturn: “Advertising spend on our platform continues to grow more slowly due to general weakness in TV advertising.”

The player segment also reported revenue declines of 7%, with $91 million in revenue. As a result of COVID, supply chain costs remain elevated above pre-COVID levels, according to Roku.

A major plot twist was served up in Roku’s latest episode of Wall Street detests change. Steve Louden, who led the initial public offering and has been with the company since 2015, will leave the company in 2023. The original plan was for him to leave in 2019, but he stayed for a few more seasons. This is just business as usual for Louden, who will help his successor transition.

Investors were equally concerned about Roku’s outlook. Consumer discretionary spending and advertising budgets will continue to be impacted by the macro environment, which will have a negative impact on results, according to the company. Management expects net revenue to decline by about 8% to $800 million in the fourth quarter. There will be a $135 million loss in adjusted EBITDA as a result. As compared to the previous quarter, that’s a decrease of $55 million.

Almost everyone on Wall Street shivered at the magnitude of the company’s decline. According to analysts’ estimates, revenue would be $899.3 million and earnings per share would be $1.10.

How Did It End?

There are a lot of challenges ahead, and it’s easy to become overwhelmed by them. To avoid missing the forest for the trees, however, investors should take a closer look. You might make a costly mistake if you sell now.

The pandemic was one of the factors contributing to Roku’s substantial loss. To keep up with its rapid growth, the company noted that its operating expenses significantly grew year-over-year as a result of “robust hiring … [and] accelerating investment.”

In response to macro conditions, Roku has slowed hiring and cut expenses but says, “this growth rate will take a few more quarters to normalize.” 

As a result, the results are distorted, making the situation appear darker than it really is. Roku is likely to suffer short-term from a tightening consumer and business spending environment. Although the current environment will change quickly once the economy recovers, investors will be better served if they adjust their expectations accordingly.

Another noteworthy achievement is Roku’s 65.4 million active accounts, which is up 16% over last year, making it a challenging audience to ignore for advertisers. The current situation is tight, but change will come quickly, and Roku will be ready for it. 

Roku’s revenue largely comes from digital advertising. Although growth may have slowed now, it will rebound once conditions improve, and the company is well-positioned to benefit from this. Statista forecasts that worldwide digital advertising spending will reach $876 billion in 2026 from $521 billion in 2021. Roku will benefit from the shift from traditional broadcast to ad-supported streaming as ad spending moves from broadcast to streaming. 

Roku offers advantages that its competitors can’t match as an industry-leading streaming platform. Their service offers 10,000 channels, including ad-supported and free streaming options. The Roku platform has always been service-agnostic, allowing viewers to find the entertainment they love from a wide range of providers. 

In addition, Roku stock provides a great bargain for bargain hunters, with a price of just 2 times next year’s sales, which is in line with what is considered a reasonable price-to-sales ratio of 1 to 2.  

It’s worth buying Roku stock if you have a long-term outlook, a bit of patience, and the stomach for volatility.