Roku stock: Turns out the bottom wasn’t in (NASDAQ: ROKU)

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It only took two weeks, but my last Roku item (ROKU) has already aged very badly. Not only did the company miss out on quarterly revenue to end the year, but the outlook for 2022 wasn’t as rosy as analysts had hoped. Shares plunged after hours and at the time of the article’s submission on Friday, the stock is trading near $110 per share and, frankly, looks set to drop. Although I was very obviously wrong on my last call, I think it’s appropriate to update my view given what we know now.

Q4 report

To say it failed would probably be an understatement. While revenue hit a record $865 million, that 33% year-over-year growth rate was well below market expectations of 38%. With fourth quarter revenue growth of 33% and operating expense growth of 49%, operating profit fell 67% year over year. Pretty bad.

Q4 2020 Q4 2021 % annual
Active accounts 51.2 60.1 17%
ARPU $28.76 $41.03 43%
Platform revenue $471.2 $703.6 49%
Player income $178.7 $161.7 -9%
Total net income $649.9 $865.3 33%
Total operating expenses $240.3 $358.3 49%

Source: Roku; active accounts, income and expense figures are all in millions

The forecast was likely even more concerning as the global supply chain issues the company cited for the Q4 revenue shortfall are still ongoing.

For 2022, we expect continued supply chain disruptions to continue to impact the global economy. This will affect the broader consumer electronics space, and the television industry in particular. Overall TV unit sales are expected to remain below pre-COVID levels, which could affect our active account growth.

Supply chain issues have impacted not only the TV makers that Roku relies on to onboard new active users through Roku’s OS, but also advertisers who have cut spending by marketing due to supply shortages. The automotive sector is probably a notable culprit here. The company forecasts revenue growth for 2022 in the mid-30s.

There were a few good takeaways from the report, however. Notably, the growth in active accounts brought the number of Roku users to 60.1 million. This is up from 56.4 million in the third quarter, representing a 6.5% quarter-over-quarter gain. Average revenue per user continued to grow, up 49% year over year and just over 2% from Q3-21. Roku’s year-over-year streaming hours were also up 15% in the fourth quarter.

Streaming peak?

One concern I see from some is that we might already be at the peak of streaming. There was even a question about TAM streaming at the end of the call. I think part of the concern about TAM streaming stems from the breadth of platform options rather than the overall distribution change. When it comes to how video is consumed, we haven’t even sniffed out the level that could be considered the pinnacle of streaming consumption. Consider the recent State of OTT report from comScore (SCOR).

Total number of monthly hours per household

Total number of monthly hours per household (comScore)

In this presentation, we can see that live TV still represents a large majority of overall video consumption. And despite year-over-year declines driven by 2020 outperformance of stay-at-home orders, average monthly hours per household increased 15% in OTT compared to just 5% for live TV compared to pre-lockdown levels. The thing is, while specific streaming platforms are already near or close to saturation points in terms of subscriber numbers, the overall view of OTT as a distribution method is nowhere near that which I think is the peak.

Streaming platforms are fragmented. We cannot deny it. Many of them come and go. Personally, at home, we have tried nearly a dozen sVOD platforms. In addition to the premium sVOD services, we also tried at least half a dozen free aVOD services. It’s the fragmentation that some people worry about in streaming. No matter what platform we watch, the one constant since we stopped paying for traditional TV service is Roku. We still use Roku every day. It’s our operating system of choice and the company serves me ads through the menu no matter which video service I choose.

My long term outlook

One of the reasons I’m as bullish as I am on Roku in the long run is the variety of ways I think the company can ultimately make money years down the line. There is some untapped revenue potential when you own the most popular operating system for streamers. A huge problem facing the advertising industry right now is measurement and attribution. This is an area where television has really struggled to prove its worth to advertisers in recent years. Some marketers often struggle to justify spending a significant portion of marketing budgets on TV when there are more robust reporting metrics that prove campaign effectiveness from digital advertising options.

Roku has the opportunity to change the attribution problem that has plagued television for the past few years. I think there is a measurement story for Roku that is underrated. Media companies have traditionally relied on third-party services like Nielsen (NLSN) or comScore to measure audience. If we believe that cable cutting will continue and on-air sports viewing via local channels will complement streaming, then current measurement services that rely on Return Path Data (RPD) methodologies could creating an opportunity market for owners of Smart TV operating systems like Roku. Many players in the TV industry are already losing faith in the accuracy of ratings.

Business models evolve over time. Amazon (AMZN) used to sell books, now it sells everything. In 2017, more than half of Roku’s revenue came from hardware. Player revenue was just 18.6% last quarter. The thing is, the models are adapting and Roku is acquiring customers for future monetization. Some of the monetization streams are obvious like advertising. Others may be a little less so. Even though the company was pretty adamant on Thursday’s call that there’s no plan to sell customer data, there are other ways to monetize viewing metrics that don’t bear necessarily invasion of privacy.

Conclusion

Of course, I could be wrong. I’ve been wrong many times and I will do it again. I’m not even going to try to pretend that I know what Roku’s stock bottom is at this point. It didn’t go so well the last time I tried. I misread the market. I learned my lesson. I won’t call Bottom again. I know I bought a few more this morning. The supply chain issues currently plaguing Roku and its partners won’t last forever. If you’re buying stocks with a longer outlook than this year or next year, I think buying Roku stock today will be very well rewarded five to ten years from now. And if you like it at $160, you like it at $105, right? Now if you’ll excuse me, I’ll sit in the corner while I scroll BagholderQuotes and I hope I don’t see myself. It’s a joke. I think.

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