Roku is set to release its 2021 fourth-quarter financial results on Feb. 17 after the market close.
Roku was a huge winner thanks to the pandemic. With people stuck at home, spending more time watching TV was a popular entertainment option. Unsurprisingly, like many stay-at-home stocks, the company has hit a bit of a rough patch in a more normalized world.
Supply Chain Issues Are Hurting Growth
During Q3 2021, Roku added just 1.3 million net new active accounts, less than what the business gained in each of the previous three quarters. Besides falling engagement, with people spending less time at home and watching less TV, Roku has been plagued by one other big problem in recent quarters: supply chain bottlenecks. This is an issue that businesses across various sectors are currently facing, so it's not unique to Roku.
However, the company's gross margin for its Player segment, which includes sales of media sticks, was negative in both the second and third quarters of 2021. Management has chosen to emphasize trying to grow the user base at the expense of the player gross profit. Therefore, they have decided not to pass along elevated input costs to consumers in the form of higher prices, a decision I think is the right strategic move for the long-term success of the company.
Roku also has licensing agreements in place with a number of different TV manufacturers, who have been impacted by supply chain delays themselves. Inflation is causing higher component pricing, resulting in Q3 U.S. TV sales being lower than the pre-pandemic level in 2019. Clearly, a situation like this is not favorable to a business like Roku that relies on getting as many devices (built with its TV operating system) in as many living rooms as possible.
Although the economic environment is out of Roku's control, any commentary the leadership team gives investors about inflationary pressures or supply chain woes will be extremely important to listen to. Amidst the headwinds, being able to continue growing active accounts of 56.4 million and quarterly streaming hours of 18 billion (as of Sept. 30), would be a very encouraging sign.
Analysts Opinion on Roku Stock
The company's Q3 revenue grew 51% to $680 million, and the analysts' consensus estimate suggests revenue to grow 38% to $897.65 million in the next quarter. The management expects revenue in the range of $885 million to $900 million and adjusted EBITDA of $65 million to $75 million. The company's active accounts at the end of Q3 were 56.4 million, a net addition of 1.3 million in Q3.
According to the NPD's Weekly Retail Tracking Service, the company has been the top-selling smart TV operating system for the second consecutive year in the U.S. Also, according to the study conducted by Hypothesis Group, Roku is Canada's number 1 streaming platform. On other recent news, Fox News International announced that it is expanding distribution on Roku, which should supplement Roku's international growth.
Deutsche Bank analyst Jeffrey Rand has lowered the company's price target to $300 from $400 and has kept the buy rating on the stock. He believes that the company is well-positioned in the rapidly growing connected TV market, and the recent sell-off is overdone. Q4 earnings could be a positive catalyst for the stock. His checks indicate that the advertising market remained strong in Q4 despite some initial concerns about brands reducing ad spending due to supply chain issues.