Shares of Roku Inc. It slipped toward its worst-ever drop on Friday after the streaming company admitted there was a “significant slowdown” in ad spending that helped push it to weaker-than-expected results that could continue beyond the last quarter.
“Consumers began adjusting discretionary spending, and advertisers significantly reduced spending in the scattered advertising market (TV ads purchased during the quarter),” Rocco Rocco,
The executives said in their shareholder letter. “We expect these challenges to continue in the near term as economic concerns pressure markets around the world.”
Roku shares fell more than 25% in Friday morning trading and are on track for their biggest one-day percentage drop ever, according to market data from Dow Jones.
Many analysts didn’t say a word when discussing the latest earnings.
“Roku’s Q2 2022 results were the sum of all our concerns,” wrote Moffett Nathanson analysts led by Michael Nathanson. “The company’s recent series of results, like many others over the past few years, have been underpinned by the massive acceleration of video streaming that has now faded as the world opens up.”
Analysts added that they were “concerned that the proportion would be appropriate.”
of digital advertising spending in 2021 was caused by unsustainable conditions in the US that are now rolling in in real time as the economy slows.”
Roku faces its own challenges, in their view, as the company has to compete with tech giants and TV makers as it tries to ensure more people stream content on Roku devices or platforms. In addition, the company “fights almost every streaming platform for audience impressions” and has tough competition in advertising as well.
“This is clearly not an ideal market structure,” the analysts wrote. “As such, due to the lack of advertising revenue and player sales, Roku now has to slow its investment spending in growth areas to preserve liquidity and protect margins.”
They evaluated Roku’s stock on market performance, with a target price cut to $62 from $93.
Wells Fargo analysts led by Stephen Cahal suggested Roku’s comments about weakness in the littered market were telling.
“This is a shock to the stock because CTV [connected TV] It was thought of as a secularly growing ad channel, and thus was supposed to be less volatile and/or gain a stake in a recessionary environment.” “While that could happen later in this cycle, in the short term it looks as if marketers are cutting budgets on CTV.” Because they can. By contrast, we believe linear TV advertising dollars are embedded more deeply through upfront contracts and brand commitments.”
They kept an equal rating on the stock but lowered their target price to $64 from $115.
“We are equal in weight because while we don’t like the near term, we also know that the longer term will create a larger market for CTV,” the analysts wrote.
Meanwhile, Evercore ISI’s Shweta Khajuria lowered its rating on the stock to a line of superiority, removing the underperforming tactical label it had put on the name prior to the report.
Roku’s Q2 EPS print was expected to be muted (hence our tactical name), but we didn’t expect headwinds (soft scatter market, weak discretionary consumer spending, inflationary pressure, supply chain issues, ASC 606 accounting impact) Very dramatic,” she wrote.
While Khajuria believes Roku will eventually be a “big beneficiary” as marketers become more confident about scattered spending, she acknowledged “we may not see that for a few quarters.” It cut the stock’s target price nearly in half, to $75 from $140.
Jeffrey Lodarczak of the Pivotal Research Group described the results and prospects as “frankly appalling” while noting that “it seems our main concern about the company has hit it like a freight train.” He said he was concerned that Roku was too aggressive in spending given the economic outlook, and thought the company’s full-year outlook might be overly optimistic.
“Essentially, despite significant growth in expenses (and overcoming second-quarter net subscriptions driven by the temporary effects of retailers dumping heavily discounted TVs into the market to reduce inventories) revenue materially missed in the second quarter and guidance for quarter revenue. Third, gross margin, and operating income is significantly (-25% in the case of revenue) worse than expected.”
Wlodarczak has an outstanding rating on Roku stock, and has cut his price target to $60 from $80.
“We also believe management will be in the penalty area for at least ’22 credits given their decision to significantly increase expenditures at the height of the economy, at least 6-12 months of results are likely to be modest frankly, a slack environment is likely to lead to a competitive environment Increasingly where most of their competitors are in a much better position to take advantage of the environment…and we see the stock flowing onto the water from here at best.”
Wedbush analyst Michael Butcher took an optimistic view of Roku’s big picture prospects, writing that the company’s long-term narrative remains “sound” even though he believes Roku has been “dead money for at least the next quarter.”
“We are confident that the scattered market will rebound over the next few quarters, and the upcoming introduction should be a positive catalyst in Q4 and 2023,” he wrote. “There’s a big runway ahead of shifting ad dollars from linear TV to digital TV, and Roku is poised to take a meaningful share of that shift.”
Pachter maintained an outperformance rating on the stock, but cut its price target to $85 from $125.
Barton Crockett, an analyst at Rosenblatt Securities, also sounded a more upbeat tone.
He wrote: “Roku’s 2Q22 has shown an advertising slump headwind that is becoming increasingly predictable as the earnings cycle progresses.” “However, after the close, volatile stocks traded as if this was a shock, down more than 25%. We take another view, and see the combination of $1 billion up front and the launch of ad layers on Netflix and Disney+ as clear catalysts to revive growth.”
He has a buy rating on Roku stock but has lowered his price target to $100 from $187.
Roku shares are down 72% so far this year as the S&P 500 SPX,
“Web maven. Infuriatingly humble beer geek. Bacon fanatic. Typical creator. Music expert.”