Roku earnings: Two reasons why this analyst is incrementally bearish on the stock
Roku (ROKU) stock plunged Friday after the company reported disappointing first quarter guidance and mixed fourth-quarter results. Evercore ISI Director of Internet Equity Research Shweta Khajuria joins Yahoo Finance Live to discuss.
Khajuria says there are two thing that have her more "incrementally negative" on the stock: while Roku beat revenue expectations, growth wasn't as robust as prior quarters. Additionally, the weak first-quarter outlook "implies" slowing expansion. However, she notes Roku did a "great job cutting costs" though, now it's shifting focus to reigniting top-line growth.
Regarding advertising, Khajuria says Roku boasts a "very large audience" with strong user data to supply advertisers. However, when it comes to advertising, the core challenge remains: "Is that platform's [Roku] value proposition diminishing because there is greater supply than there is demand?"
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Editor's note: This article was written by Angel Smith
Video Transcript
MADISON MILLS: Shares of Roku tumbling after reporting its fourth quarter earnings. The streaming service beating the Street's revenue expectations in the latest quarter with active accounts surpassing 80 million. But Roku signaled near-term challenges ahead thanks to an uncertain macro backdrop and uneven recovery in the ad market.
For a deeper dive into the company's latest results, we're joined by Shweta Khajuria, Evercore ISI director of internet equity research. And Shweta, thank you so much for joining us. You laid out some key questions for the call in your note. I'm curious, did the call change your thinking about this earnings print at all?
SHWETA KHAJURIA: Well, first of all, thanks for having me. There were a few things that came out that got us incrementally negative on Roku, a few things. One is that the magnitude of the beat in the fourth quarter was not as robust as what they have done in the past. And two, the first quarter guidance implies growth rate that was less-- somewhat slower or muted than we expected.
And the management team called out muted demands in their M&E segment, which is Media and Entertainment segment of platform revenue, which is a high-margin business and as well as tougher comps in SVOD or their subscription business. Because price increases and ad-supported subscription tiers that were launched in 2023 got that revenue segment to be very robust or healthy throughout 2023 and so now they have tougher comps. So for a variety of reasons, the growth rate expected in 2024 is likely not going to be as high as investors were expecting.
And then the second thing is on profitability, which is a key thing for this company. And they did a great job by cutting costs. They had several rifts or reduction in workforce and that was in 2023.
What management said during the call was 2024 remains a year where they will now think about top line growth, invest some of their profits and gains back into the product and feature upgrades. And so with that, the implication there is that perhaps the philosophy of their guidance has not changed, but the upside that we could have-- investors could have perhaps seen in 2024 to profitability may now be a little bit more tempered. So for those reasons, I'm incrementally a little less bullish on it or I guess incrementally bearish on Roku.
RACHELLE AKUFFO: So Shweta, when you think about where some of these companies want to have ad spend, why would it be a Roku versus say one of these bigger ecosystems, your Apples, your Amazon? What sort of edge do you think Roku could have in this space?
SHWETA KHAJURIA: Well, Roku has 80 million active accounts and that is a very large audience. That is a-- majority of them are in the US, but they have a very good presence in North America and Mexico, as well as in Canada and some of the other countries as well. So having that audience and some of it that is fully complimentary to some of the other platforms is a huge plus for advertisers.
And the fact that they have first-party data of all logged-in users, they know who is watching what, and being able to deliver that return to advertisers on that audience is a key value proposition that Roku offers. The challenge or the question for Roku's differentiated moat and value proposition on a go-forward basis is that with more supply coming in, with Amazon Prime Video ads now coming in and a lot more other streaming platforms also offering ad-supported tiers, is Roku-- Roku monetizes the Roku channel the best, is that app or is that platform's value proposition diminishing because there's greater supply than there is demand? And there are only so many ad dollars to be circulated.
