Roku Posts Weak Q2 Earnings; Slashing Fair Value Estimate for Roku Stock to $80

Roku Stock at a Glance

• Current Morningstar Fair Value Estimate: $80
• Star Rating: 3 Stars
• Economic Moat Rating: None
• Moat Trend Rating: Negative

Roku Earnings Update

Roku (ROKU) reported a weak second quarter with revenue and EBITDA below FactSet consensus. Revenue growth of 18% year over year came in below management’s prior 25% guidance. Management pulled its full-year top-line forecast of 35% growth, which we had viewed as too aggressive. Roku expects the slowing economy to further hurt the ad scatter market, while inflation worries lower consumer spending. The firm forecast 3% growth for the third quarter, which would be the first single-digit growth quarter over the last five and half years.

Reducing Roku Stock’s Fair Value Estimate From $135

As a result, we are slashing our fair value estimate to $80 from $135 on lower revenue expectations in not only 2022 but over the next five years (14% on average versus 21% previously) due to increasing competition for streaming ad dollars from both incumbent players like Pluto and Hulu and newer ones like Disney+ and Netflix.

Consumer Spending Slowdown Hits Revenue Growth

Revenue growth suffered due to a slowdown in consumer spending, which hurt both ad revenue and customer acquisition. Top-line growth of 18% was the slowest since the fourth quarter of 2016 when platform revenue was only 25% of total revenue versus 88% this quarter. Net new account activations of 1.6 million was the firm’s second highest second quarter, beaten only by the pandemic-influenced second quarter of 2020. Despite the account growth, the firm believes that lower TV and player inventory still impeded customer adds. Streaming hours grew 19% year over year to hit 20.7 billion and only fell 1% sequentially from the all-time high last quarter.

Average platform revenue per account increased 11% year over year to $3.61 but appears to have missed the firm’s internal projections as management expected higher pricing growth. The firm disclosed that the ad scatter market weakened tremendously in the second quarter as consumers pulled back on spending. Unlike the established linear networks with robust upfront ad sales, Roku is still very dependent on the near-term scatter market that advertisers can curtail quickly.