Key points
- Streaming video platform hardware and software provider Roku reported strong fourth-quarter 2023 top-line and profit growth and raised its forecast.
- A drop in average revenue per user (ARPU) caused the shares to plunge more than 35% in the following days.
- Roku’s ARPU fell below $40 for the first time since Q2 2021, with 55.1 million users.
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Video streaming hardware and software platform operator Roku Inc. NASDAQ: ROKU shares tumbled more than 35% following its fourth-quarter 2023 earnings report. The company generates most of its revenue from legacy hardware sales, Roku TV sales, licensing of the Roku operating system to Smart TV manufacturers and the management of its eponymous ad-supported streaming channel, Roku Channel. Its shares had a parabolic run to $108.84 on November 29, 2023.
Shares of the consumer discretionary company also took a hit Walmart Inc. New York Stock Exchange: WMT announced the acquisition of the smart TV maker Vizio Holding Co. (NYSE: VZIO) and its SmartCast operating system on February 20. This was the second gut punch after the earnings beat pushed the stock further lower.
It’s all about ARPU
Roku has benefited from the cord-cutting trend, the growth of ad-supported channels, and the migration to streaming TV and entertainment services, which has driven viewer engagement to a record high of up to 100 billion hours in 2023, averaging 4.1 hours per day per account in Q4.
Roku’s active account base has grown more than the customer bases of the six largest pay-TV operators combined. Unfortunately, its average revenue per user (ARPU) declined in the fourth quarter of 2023, sending shares down more than 35%.
The ARPU conundrum
The law of averages dictates that if more users join the platform with stable revenues, its ARPU naturally decreases as the denominator grows. Therefore, revenue must increase proportionately to grow ARPU.
However, Roku grew its user base by 14.3% year over year (YOY) to 80 million users. Streaming hours increased 21.8% year over year to 29.1 billion hours. Roku grew its revenue 14% year over year to $984 million. But ARPU fell 4.2% year over year to $39.92. While APRU has had its ups and downs, it has never dipped below $40 since the second quarter of 2021, when Roku only had 55.1 million users.
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Causes of ARPU decline
The cause of this decline in ARPU lies primarily in the growth of international users. Roku is growing but takes in less money from international users, historically a much smaller ARPU.
The United States and Canada generate the highest ARPU on streaming platforms and services compared to Netflix Inc. NASDAQ: NFLX and social media platforms Snap Inc. NYSE: SNAP, Pinterest Inc. NYSE: PINS AND Meta Platform Inc. NASDAQ: META
While international user growth may increase total user growth metrics, it also drags total ARPU metrics.
Strong user and revenue growth
On Feb. 15, Roku reported a loss of 55 cents per share, in line with analysts’ estimates. Roku achieved positive adjusted EBITDA and free cash flow for 2023, ahead of schedule. Revenue rose 1% year-over-year to $984.4 million, beating analysts’ estimates of $967.72 million.
Increased revenue guidance
Roku raised first-quarter 2024 revenue to $850 million versus analysts’ consensus estimates of $829.5 million. Total gross profit is expected to be approximately $370 million, with a net loss of approximately $90 million. Adjusted EBITDA is expected to be zero.
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Roku CEO Anthony Wood saw 2023 as the year of reduced operating expenses and improvements to internal operations. Wood predicts 2024 will be the year of platform growth and innovation. It noted that despite the recovery of the advertising market, the recovery is uneven and expects to face a difficult media and entertainment environment in 2024. Margins for its platform are expected to compress soon and maintain a growth rate of 13% in the first quarter of 2024, lower than expected. 18% platform growth observed in Q3 2023.
It will be a better programmer than its home screen to help monetize its 80 million active users. He noted, “We use it to increase ad reach, which correlates to increased revenue, as well as increase our streaming service distribution efforts.”
CEO Wood predicts greater demand for ad-supported streaming. Wood commented, “We expect strong demand for ad-supported tiers on Roku, as many users seek affordable streaming options. With the benefits of our platform, our beloved brand, first-party relationships with 80 million active accounts and deep user engagement, we are well positioned to accelerate revenue growth in future years.”
Analysts downgrade
After Roku’s earnings report, several analysts chimed in with downgrades and price cuts. Pivotal Research reiterated its “hold” rating but lowered its price target to $75 from $85. Citigroup reiterated its “neutral” rating but lowered its price target from $110 to $75.
Oppenheimer narrows his range from “perform” to “exceed.” Analyst Jason Helfstein noted, “While we are bullish on new management’s strategy to embrace programmatic 3P demand and increase data integration to drive performance-based campaigns, a high percentage of platform revenue is driven by SVOD advertising, SVOD price increases, and media and entertainment advertising. These areas are expected to struggle through much of 2024.” They removed the $100 price target and see the stock price bounded into 2024.
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Descending Triangle Daily Distribution Pattern
The daily candlestick chart on ROKU illustrates a descending triangle breakdown pattern. The descending trendline formed at a high of $108.24 on November 29, 2023. The flat-bottomed trendline formed at $87.03 after testing multiple times.
The daily 50-period moving average (MA) has turned into resistance ahead of Q4 2023 earnings, resulting in a break through the flat-bottomed trendline on the gap to $78.61 and through the daily MA to 200 periods on February 16th.
Shares continued to fall again to sell off $68.38 following the announcement of WMT’s purchase of competitor ROKU VZIO, sending shares to a swing low of $62.26 on Feb. 22. The market structure low (MSL) daily buy trigger formed at $65.20.
The daily relative strength index (RSI) has fallen below the 30 band but is attempting to climb back up. The pullback support levels are at $62.26, $57.32, $52.34, and $50.42.
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