After Roku issued “frankly horrific” guidance, as one analyst put it, Wall Street appears to be backing away from the stock.
While Roku beat third-quarter expectations Thursday, the company issued fourth-quarter guidance below expectations in what is usually the strongest advertising quarter for the stock. Shares of Roku were down 5 percent during midday trading Thursday.
“Companies are pulling back their ad budgets because they’re uncertain if there’ll be a recession or not, and so a lot of Q4 ad campaigns are being canceled,” Roku CEO Anthony Wood explained during the company’s earnings call.
Pivotal Research Group, which called the fourth-quarter revenue guidance of roughly $800 million, a decline of 7.5 percent year over year, “horrific,” sees even more going on there.
“For 4Q Roku’s guidance implies not only a [year over year] material decline, but an almost unheard of sequential decline in platform revenue into what is normally by far the most robust advertising quarter of the year (boosted this year by political) and this is despite all the viewing momentum in streaming TV,” wrote analyst Jeff Wlodarczak. “Our view is the TV/digital ad backdrop is not great, but there appears to be something specific going on at ROKU that seems to have significantly exacerbated the problem.”
Wlodarczak said Pivotal’s “best guess” is that the company’s stronger historic results, due to COVID-19 lockdowns and an “overreliance” on digital advertising, among other factors, created difficult year-over-year comparisons, which were only made worse by the weakness in the ad market. Additionally, he noted that “ROKU management frankly may have overplayed their hand with large advertisers/media companies.” Pivotal cut their price target to $40 from $60 and maintained a hold rating.
While noting that this quarter “puts ROKU into the investor penalty box,” where it will stay for some time, Wells Fargo analyst Steven Cahall said he believes the low guidance implies “a lot of deferral activity” for Roku in the ad market. Close to two-thirds of the company’s platform revenue is exposed to the scatter market, which is exacerbating the hit, alongside the company’s high fixed cost structure and high operating expenses.
Alongside the lowered guidance, many analysts said that there’s an overall lack of visibility into the company’s trajectory and into what has propped up the stock thus far.
Wells Fargo analysts cut Roku’s price target to $45 from $64, leaving its equal weight rating unchanged, saying that they had “overestimated” the company’s ability to slow overhead growth — a promise the company had previously made —and noting that it’s challenging to value Roku within the connected TV space, in which the analysts don’t believe “there’s great product differentiation.”
Guggenheim downgraded Roku to neutral from buy and removed its price target.
“We lack visibility into key business drivers including advertising revenue trends (let alone types of ad revenue), international growth, specific investment goals, and long-term profitability objectives,” wrote Guggenheim analyst Michael Morris.
The analysts still believe in “the long-term opportunity for CTV” and see value in Roku’s active account base and operating assets. They also believe that Roku will likely beat its fourth-quarter guidance, as it did in the third quarter. But the environmental factors, in addition to the company’s “likely intent to increase spending if cyclical conditions improve” hold them back on the stock.
While calling Roku, “a business school case study of both the benefits and downsides of obfuscating core parts of one’s business,” MoffettNathanson analysts wrote the company’s lack of disclosure around its growth strategy is now coming back to bite bullish investors.
“With little to go on beyond a wide-spread narrative that this was a company of the future in an industry of the future, many investors and analysts acted as Roku likely hoped and simply clicked-and-dragged-right, propping up the stock for far longer than they might have if the company been more forthcoming that much of the growth had come from significant and unsustainable revenue from new streaming entrants,” wrote analyst Michael Nathanson.
MoffettNathanson, which has an underperform rating on the stock, lowered their price target to $38 from $44.
Still, there were notes of optimism among the analyst community.
While saying that Roku has faced “unpalatable losses” and “is likely dead money over the next two quarters at least,” Wedbush analysts continue to believe in the long-term trajectory of the company, as well as its commitment to pullback on hiring to stem some of the losses. This comes even as they say Roku has likely been set back at least a year on its growth plan.
“Once macroeconomic trends improve, we think there is still significant runway ahead for shifting ad dollars from linear TV to digital, and Roku is poised to take a meaningful and growing share of this shift,” wrote Wedbush’s Michael Pachter, who reiterated his outperform rating for the stock and maintained his $75 price target.
Oppenheimer analysts also believe in the outsize potential of new hire Charlie Collier, the former Fox executive who joined Roku in October to lead its advertising and content business. They believe Collier will be able to move Roku further away from the scatter market, which has been heavily impacted by macroeconomic trends, and toward third-party automated advertising.
Wedbush maintained an outperform rating but reduced its price target to $58 from $80.