Shares of Roku Inc. tumbled to their worst-ever drop on Friday after the streaming company acknowledged a “significant slowdown” in ad spending that propelled it to weaker-than-expected results and could linger beyond the latest. trimester.
“Consumers began to moderate their discretionary spending and advertisers significantly reduced spending in the ad serving market (TV ads purchased in the quarter),” Roku ROKU,
the executives said in their letter to shareholders. “We expect these challenges to continue in the near term as economic concerns put pressure on markets around the world.”
Shares of Roku are down more than 25% on Friday morning and are on track for their biggest single-day percentage decline on record, according to Dow Jones Market Data.
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Many analysts didn’t mince words when discussing the latest results.
“Roku’s Q2 2022 results were the sum of all our concerns,” wrote analysts at MoffettNathanson led by Michael Nathanson. “The company’s recent streak of results, like many in recent years, was supported by the massive acceleration in video streaming which has now faded as the world has opened up.”
Analysts added that they “fear that a decent percentage
of digital ad spend in 2021 was caused by unsustainable conditions in the United States that are now reverberating in real time as the economy slows.
Roku faces its own challenges, they say, as the company has to compete with tech giants and TV makers as it tries to ensure more people stream content on the devices or platforms. Roku. Additionally, the company “combats nearly every streaming platform under the sun for viewership impressions” and also has strong competition in advertising.
“Obviously, this is not an ideal market structure,” the analysts wrote. “As such, given the shortfall in advertising revenue and player sales, Roku must now slow its capital spending in growth areas to preserve cash and protect margins.”
They are pricing Roku shares on market performance, while reducing their price target to $62 from $93.
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Wells Fargo analysts led by Steven Cahall suggested that Roku’s comments on dispersed market weakness were telling.
“It’s a title shock because CTV [connected TV] was considered a secular growth advertising channel and therefore should have proven less volatile and/or gaining share in a recessionary environment,” they wrote. “While it may come later in this cycle, in the short term, it looks like marketers are cutting budgets on CTV because they can. In contrast, we believe linear TV ad dollars are more deeply embedded through initial contracts and brand engagements.
They kept an equal weight rating on the stock, but cut their price target to $64 from $115.
“We are evenly matched because while we don’t like the short term, we also know the long term will create a bigger CTV market,” the analysts wrote.
Evercore ISI’s Shweta Khajuria, meanwhile, lowered her rating on the title to be in line with the outperformance, while removing the tactical underperformance tag she had put on the name before the report.
“Roku’s Q2 EPS print was expected to be muted (hence our tactical call), but we didn’t expect headwinds (soft market dispersion, weakening consumer discretionary spending, pressure inflationary, supply chain issues and ASC 606 accounting impact) be so dramatic,” she wrote.
While Khajuria thinks Roku will ultimately be a “big beneficiary” as marketers become more confident about dispersed spending, she conceded that “we might not see that for a few quarters.” She cut her price target on the stock nearly in half, from $140 to $75.
Jeffrey Wlodarczak of Pivotal Research Group called the results and outlook “frankly horrifying” while noting that “it seems like our primary business concern has suddenly hit them like a freight train.” He said he was worried Roku had been too aggressive on spending given the economic outlook and thought the company’s full-year guidance may have been too optimistic.
“Basically, despite significant expense growth (and a beat on Q2 net new subs due to the temporary effects of retailers dumping TVs at significantly reduced prices on the market to reduce inventory), revenue significantly missed in Q2 and guidance for Q3 revenue, gross margin, and operating revenue is significantly (-25% in the case of revenue) worse than expected,” he wrote.
Wlodarczak has a holding rating on Roku shares, and he cut his price target to $60 from $80.
“We also believe management will be in the penalty box for at least the remainder of 22 months, given its decision to massively increase spending during the height of the economy, results for at least the next 6-12 months. will likely be downright mediocre, a recessionary environment will likely lead to an increased competitive environment where most of their competitors are much better positioned to take advantage of the environment…and we see the stock in place best from here” , he wrote.
Wedbush analyst Michael Pachter took an optimistic view of Roku’s overall outlook, writing that the company’s long-term narrative was still “intact” even though he believed Roku was “of the dead money in the next quarter at least”.
“We believe the dispersion market will rebound over the next few quarters, and the next front should be a positive catalyst in Q4 and into 2023,” he wrote. “There is a significant avenue to walk in shifting advertising dollars from linear TV to digital, and Roku is poised to take a significant part of that shift.”
Pachter retained an outperform rating on the stock but cut its price target to $85 from $125.
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Rosenblatt Securities analyst Barton Crockett also struck a more optimistic tone.
“Roku’s 2Q22 featured ad recession headwinds which, as the earnings cycle progressed, became increasingly predictable,” he wrote. “Yet after the close, the volatile stock traded like a shock, down more than 25%. We take another view and consider the combination of an initial $1 billion of dollars and the launch of advertising levels on Netflix and Disney+ as clear catalysts to revive growth.
He has a buy rating on Roku shares but lowered his price target to $100 from $187.
Roku shares have plunged 72% so far this year as the S&P 500 SPX,