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Everyone knows Roku, Inc. (NASDAQ: ROKU) these days. Whether it's a streaming player, smart TV or wireless speaker, they are in millions of households across America with over 65 million active accounts streaming 21.9 billion hours during the last quarter. That's big for any kind of company and even close to the most well-known name in streaming, Netflix. Not only in the US, they are also expanding globally and recently launched in Mexico, Germany and many other locations.
Roku may have one of the most popular streaming devices in America and If you just looked at the top line numbers you may think Roku is in a great position. In Q3'2022 they posted $761M in sales, beating its $700M guide by 8.7%, grew active accounts by 16% YoY and average revenue per user (ARPU) was $44.25, up 25.1% compounded annually over the last three years.
But that is where the good news ends for this streaming giant as costs continue to explode, leading the stock to drop over 15% after hours, even with the stock down roughly 90% from its peak in 2021.
Let's dig into the numbers.
Roku started strong out of the gate reporting total net revenue growth of 12% year over year to $761 million. While that is great that they continue to grow revenue, the key metric gross profit has seen zero incremental growth in four quarters and actually down 2% to $357m year over year. On top of that, gross profit is set to collapse to $325m based on its released guidance.
Costs have also continued to balloon with sales and marketing expenses up 91% year over year to 209.4m. R&D is also following a similar trajectory, up 73% with very little to show for it.
These costs have destroyed free cash flow for the company with net cash provided by operating activities dropping from $253.508 million down to $4.442 million. Even with revenue continuing to grow to $800 million next quarter based on Roku's estimates, net loss will still be $245 million.
Roku did mention cost cutting saying "We will continue to slow headcount and OpEx growth in response to the macro environment while continuing to make disciplined investments in our most strategic projects that will increase both the market penetration of our platform and long-term customer value." This could be too little to late given how consumer spending and advertising budgets are trending.
While Roku's business is definitely being hurt by cutbacks in advertising budgets, we are still nowhere near a bottom and that means the stock can't turn around. Cathie Woods ARK funds also owns 11.9 million shares of 9.9% of the company and if they decide to sell, it could also put more downward pressure on the stock.
Roku has been profitable in the past and until management turns the company around, it is best to stay away from this streaming player. They should have been cutting costs as interest rates continued to rise and with ad sales trending weaker than peers, it could be a rough ride for the company given the guide down during the holiday season.
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