Roku (ROKU) shares plunged Friday after the streaming service hub posted weaker-than-expected fourth quarter earnings and sharp slowdown in revenue growth.
Roku said revenues for the three months ending in December were pegged at $865.3 million, with active accounts rising 17.4% from last year to 60.1 million. The revenue total, however, missed Street forecasts, as did the current quarter outlook of $720 million, as supply chain disruptions clip sales of its bespoke sets and devices.
Roku's revenue growth has also slowed dramatically from earlier in the year -- in line with the decreases in subscriber growth seen from the likes of Netflix (NFLX), AT&T (T) and Disney (DIS) -- with the December quarter tally rising 33%, compared to a 51% gain in the third quarter and an 81% surge over the three months ending in June.
Plans for a big ramp-up in spending in order to create original content that Roku can take a larger cut of ad revenue against, is also adding to concerns over its ability to generate near-term earnings, and margins are set to retreat back to pre-pandemic levels as a result.
Roku is set to spend between $250,000 and $750,000 for an unscripted episode of original content, with costs rising to as high as $5 million for scripted entertainment, although that would still be 'significantly less' than budgets typically allocated by rivals such as Netflix and Disney.
"We believe large traditional TV advertisers will continue to shift to Roku for the targeting, measurement, optimization, and superior ROI that we provide," CEO Anthony Wood told investors on a conference call late Thursday. "And for digital-first advertisers and small and medium businesses, Roku makes advertising on TV more accessible. We remain focused on maximizing our competitive differentiators, extending our industry leadership and driving growth, both in the U.S."
Roku shares were marked 25% lower in early Friday trading to change hands at $109.25 each, a move that would extend the stock's six-month decline to around 70%.
KeyBanc Capital Markets analyst Justin Patterson, however, thinks the market could be over-reacting to Roku's revenue declines and spending ramp, arguing that its near-term guidance "suggests Roku is simply reinvesting the amount by which 2021 outperformed."
"While margin compression warrants some de-rating amid rising interest rates, this does not appear to be a structural shift in strategy or earnings power," he added.
