Roku share price drops ahead of expected Q4 earnings miss

The streaming manufacturer has struggled to maintain momentum after its lockdown gains and has faced difficulties due to the supply chain squeeze, though growth in account numbers and revenues per user paint a better picture for Roku.

The Roku [ROKU] share price has plunged ahead of a gloomy fourth-quarter forecast, with analysts expecting the video streaming group to see a 98% drop in year-over-year earnings when it reports Q4 figures on 17 February.

The company has struggled to keep up amid supply chain woes and the reopening of outdoor entertainment as pandemic restrictions lift.

Although analysts polled by Zacks Investment Research forecast the group will post earnings per share of $0.01, revenue is expected to reach $902.27m. Roku’s own forecasts place Q4 revenue at $893m, up 37% year-over-year. Revenue growth has been buoyed by the “secular shift to streaming”, the company said in its third-quarter announcement.

The company added that it “remains well positioned” due to its “scale, brand, technology and relentless focus on the TV streaming experience”.

However, Roku also mentioned ongoing headwinds caused by supply chain disruption for its hardware devices and Roku TVs, which could continue to impact earnings in the present quarter.

Roku share price struggles

This uncertainty has plagued the Roku share price over the past 12 months. As of 14 February it had fallen 66.1% year-to-date to close at $159.02. During that period it climbed to a high of $479.50 in late July, but hit a low of $145.18 in early February.

Perhaps Roku 2021 performance has been eclipsed by standout figures from 2020, when people overwhelmingly turned to streaming during lockdowns. Although the trend towards streaming seems clear, the demand was clearly accelerated by the Covid crisis.

Roku opted to absorb higher supply chain costs rather than hike prices of its hardware devices. This hit profitability.

The market’s move away from tech growth stocks to value stocks during this new era of higher inflation and interest rates has caused further headwinds for Roku and other companies in the streaming space, though it has borne the brunt more than some of its peers. For example, Amazon [AMZN] has seen its share price drop 5.3% in the past 12 months and Comcast [CMCSA] was down 9.3% over the same period.

Roku has a 6.42% weighting in the Ark Innovation ETF [ARKK], which has slumped 54% in the past 52 weeks.

Mixed performance in Q3

In its third quarter Roku reported revenues of $680m, up 51% but missing expectations of $683.4m. Its earnings per share of $0.48 beat expectations of $0.06.

Active accounts came in at 56.4m, up 23% year-over-year, but down on the 28% growth in the second quarter. This, Roku said, was down to global supply chain disruptions that have impacted the US television market.

Average revenue per user, at $40.10, was up 49% year-over-year, while streaming hours rose 21% over the same period to an average of 3.5 hours per user per day.

Despite the revenue miss, Roku was optimistic about the “global shift to TV streaming”, noting that its Q3 performance “demonstrates the strength of our business fundamentals and the momentum of our platform monetisation”. The group added that its work with traditional television advertisers has been making progress and that it is seeking to broaden its market to also include digital-first advertisers.

However, the company’s third-quarter report failed to inspire investors, and the share price fell 8% after the announcement.

Roku could be a buying opportunity

According to CNN, analysts expect Roku to report earnings per share of $0.06 and revenues of $896.6m.

Although a slowdown in earnings is expected, Deutsche Bank analyst Jeffrey Rand believes the fourth-quarter announcement could be a “positive catalyst for the stock”, The Fly reported.

Rand added that “the advertising market remained strong in Q4 despite some initial concerns about brands reducing spending on supply chain issues”. As a result, the analyst thinks that the share price correction is “overdone”, as Roku “remains well positioned and the market leader in the rapidly growing connected TV market”.

Rand raised some concerns about the group’s active account and platform revenue growth in the near term, particularly as investors continue to compare present growth with the lockdown streaming surge. However, Rand concluded by recommending the stock as a buy at its current price level.

Indeed, investors will be eager to hear management’s thoughts on consumer demand, inflationary pressures, supply chain squeezes and advertiser sentiment when Roku makes its Q4 announcement.

Looking ahead, according to 26 analysts polled by MarketScreener, the stock has a consensus ‘buy’ rating and an average target price of $325.88, representing an upside of 105% on the 11 February closing price.