By most measures, it was a solid first quarter. The top and bottom lines improved year over year, both coming in above analyst consensus estimates. The company also expanded its active customer base, and collectively those customers increased their use of the product.
And yet, Roku (NASDAQ: ROKU) shares are down just 8.6% as of 12:36 a.m. ET Friday, reflecting investor frustration with the streaming technology company's revenue prospects and declining profitability.
That's where the headwinds come
For the first quarter, Roku turned revenue of $881.5 million into a loss of $0.35 per share. Both were improvements from 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 number of active users to 81.6 million, and those users collectively watched 30.8 billion hours of streaming programming. These figures increased by 14% and 23% year-on-year respectively.
However, the future does not look so bright. While Roku's second-quarter revenue guidance of $935 million beat analysts' consensus expectations of $931.4 million, management expects results could prove relatively lackluster further down the line. “Looking ahead, we face difficult year-over-year comparisons of growth rates across the streaming services distribution business,” said founder and CEO Anthony Wood in his first quarterly letter to shareholders.
Translation: The highest growth days of the premium streaming market are in the past.
That won't necessarily be catastrophic for Roku. People still watch as much television as ever before. They're just more ad-supported and free to watch streaming content, which plays into Roku's hands. Its own free, ad-supported channel is attracting an increasing share of U.S. viewers, according to TV ratings agency Nielsen.
The ad-supported/free-to-view streaming business model tends to yield significantly lower revenue per user, and Roku's average revenue per user (ARPU) may have already reached its peak. At $40.65 per household in the first quarter, the metric is down from a mid-2022 high of $44.01. Since that time, Roku's gross profit margins for its advertising business have also fallen from over 60% to a figure closer to 50%. This suggests that the company has a pricing problem, a cost problem, or a combination of the two.
Roku stock is risky, but the reward can be worth it
These challenging budget trends are certainly concerning. But it should be noted that nothing about Roku's shrinking profit margins or stagnant ARPU was entirely unexpected, nor are the problems insurmountable. These weaknesses largely depend on the size and age of the company and the continued maturation of the streaming market. Roku is still successfully doing the most important thing for its business: bringing more users to its ecosystem, where they watch more and more streaming content.
There is certainly above-average risk involved in buying Roku stock. However, with the stock price down nearly 90% from its 2021 high, 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 holds and recommends positions in Roku. The Motley Fool has one disclosure policy.
Why Roku stock is plummeting today was originally published by The Motley Fool
