Overall, it was a solid first quarter. Sales and profits improved year-over-year and both came in above analyst consensus estimates. The company also expanded its active customer base, and overall, these customers increased usage of the product.
And yet, Year (NASDAQ:ROKU) Shares were down 8.6% as of 12:36 p.m. ET on Friday, reflecting investor frustration with the streaming technology company’s revenue outlook and declining profitability.
Here comes the headwind
In the first quarter, Roku reported revenue of $881.5 million at a loss of $0.35 per share. Both were improvements compared to the same period last year, when the company posted revenue of $741.0 million and lost $1.38 per share. Analysts on average had forecast revenue of $848.6 million and a loss of $0.62 per share. The company also increased its active users to 81.6 million, and those users collectively watched 30.8 billion hours of streaming programming. These metrics increased 14% and 23%, respectively, year-over-year.
However, the future doesn’t look quite so bright. Although Roku’s second-quarter revenue forecast of $935 million was better than analysts’ consensus expectation of $931.4 million, management expects results could prove relatively lackluster moving forward. “Looking forward, we face difficult comparisons of year-over-year growth rates in sales activity for streaming services,” noted founder and CEO Anthony Wood in his first-quarter letter to shareholders.
Translation: The premium streaming market’s highest-growth days are in the past.
This won’t necessarily be catastrophic for Roku. People are still watching as much TV as ever. They’re simply watching more ad-supported and free streaming content, which plays into Roku’s hands. His own free, ad-supported channel is attracting a growing share of U.S. viewers, according to TV ratings agency Nielsen.
However, the ad-supported/free streaming business model tends to result in significantly lower revenue per user, and Roku’s average revenue per user (ARPU) may have already peaked. At $40.65 per household in the first quarter, the metric has slipped from its peak of $44.01 in mid-2022. Since then, Roku’s gross margins for its advertising business have also fallen from over 60% to nearly 50%. This suggests that the company has a pricing power problem, a cost problem, or a combination of both.
Roku stock is risky, but the reward could be worth it
These challenging budget trends are certainly concerning. However, it should be noted that neither Roku’s shrinking profit margins nor stagnant ARPU were entirely unexpected, nor are the problems insurmountable. These weaknesses are largely due to the size and age of the company, as well as the continued maturation of the streaming market. Roku is still successfully doing what’s most important to its business – bringing more users into its ecosystem where they watch more and more streaming content.
Buying Roku stock certainly involves above-average risk. However, with the share price down nearly 90% from its 2021 peak, the potential upside justifies the risk for those who can stomach it.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.
Why Roku Stock Is Tumbling Today was originally published by The Motley Fool