Roku Q3 Earnings: New Low On Awful Guidance (NASDAQ:ROKU)

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After the bell on Wednesday, we received third quarter results from streaming platform Roku (NASDAQ:ROKU), seen in this investor letter. Once one of the pandemic darlings, shares have collapsed as growth has slowed dramatically. Last quarter, the company issued terrible third quarter guidance, shocking the street and sending the stock much lower. It turns out that Q3 wasn’t as bad as management thought, but Q4 guidance today was even worse, sending shares to a new 52-week low.

Roku delivered revenue of $761 million for the period. That smashed street estimates, but don’t forget that guidance for $700 million in Q3 was well below the street’s expectation for more than $900 million back at that July report. The company was able to add 2.3 million users in the period, but monetization efforts were not as successful. Average revenue per user growth was just 15 cents sequentially, the lowest increase since Q4 2016, and as the graphic below shows, the year-over-year numbers are back to early pandemic levels.

ARPU Growth

ARPU Y/Y Growth (Company Earnings Reports)

While revenues are still growing, expenses are growing at a much faster pace. The company reported a Q3 operating loss of $147 million, compared to a $69 million operating profit in the year ago period. With revenues coming in much higher than street estimates, the bottom line also beat quite significantly. Roku lost 88 cents per share, while analysts were looking for a $1.29 loss. The company’s net income picture has swung in a negative way by nearly $480 million from the first nine months of 2021 to the same period this year. The company is also about $92 million free cash flow negative for 2022 so far, as compared to positive $225 million for the first three quarters last year.

Unfortunately, the two headline beats were again overshadowed by the company’s guidance. Roku guided to Q4 revenues of $800 million, which was roughly $95 million below street estimates. Don’t forget, the street average had come down by roughly $300 million in between reports, so this is another major disappointment. Management is also guiding for a much larger loss than expected, perhaps more than $1.75 a share, which is about 60 cents worse than the street was looking for.

Management laid out many of the items we already know are occurring. Weak macroeconomic conditions are leading to significant pullbacks in advertising spending, and there is no clear path as to when the situation will normalize. Also, because the company was previously set for much stronger growth, it will take a few more quarters for operating expense growth to be fully controlled. Perhaps this name can become a second half of 2023 story, but for the near term, the situation looks bleak. The company also announced that it will be bringing on a new CFO sometime next year, as current CFO Steve Louden is leaving the company when a successor is in place and ready to go.

As for Roku shares, they lost more than 18% in the after-hours session to a new 52-week low around $44, but were down well over 20% at one point. Going into this report, the average street price target was nearly $80 per share, but that seems likely to come down on this guidance miss. Just about 15 months ago, analysts thought this name was worth more than $465 per share, but that valuation has come down considerably as growth has slowed.

There certainly has been a shift away from pandemic favorites like Roku, especially as the Fed has continued its series of rate hikes. Shares are now down more than 90% from their all-time high, with much of the pain coming in the last year, as seen in the chart below. Also, the post-earnings fall won’t help the technical picture, as the 50-day moving average was just starting to level off. That key technical trend line is very likely to start falling rapidly again, which could add resistance if shares try to rally.

1 Year Chart

Roku Last 12 Months (Yahoo! Finance)

In the end, Roku disappointed investors yet again on Wednesday, sending shares to a new 52-week low. While Q3 numbers beat dramatically reduced estimates, the Q4 guidance miss was even larger in dollar terms, and management is calling for an even larger quarterly loss. It is clear that this pandemic darling has seen its growth slow dramatically, and weak ad spending will pressure the business for at least a few more quarters. Unless the overall market rebounds soon, we could see more new lows coming for this name.

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