Roku shares plunged more than 22% Friday, the day after the streaming giant posted a Q4 revenue miss and saw streaming hours decline. The company is also grappling with supply chain constraints that are impacting TV sales and hindering Roku's ability to drive new accounts.

Roku, which saw big gains during the early stages of the pandemic as consumers stayed home to entertain themselves, is now seeing its business edge the other way. Total Q4 2021 revenues of $865 million missed analyst expectations, as did the $704 million coming in from a Platforms unit (which includes advertising, content and OS licensing for products such as integrated Roku TVs) that has been responsible for the bulk of the company's growth. Player revenues dropped 9%, to $161.7 million.

Figure 1: Shares in Roku closed down $32.25 (-22.29%) to $112.46 each on Friday (February 18).
(Source: Richard Levine/Alamy Stock Photo)

Roku's active accounts climbed 8.9 million, to 60.1 million. Roku noted that growth rates for active accounts slowed a bit in the second half of 2021, attributing that largely to global supply chain disruptions that are affecting the US TV market. "Some of our Roku TV OEM partners were hit particularly hard with inventory challenges, which negatively impacted their unit sales figures and market share in Q4," Roku explained in its quarterly investor letter (PDF).

Sales of Roku players were down only 5% year-over-year, but gross margins on those products turned negative in Q4 again and for the full year as Roku kept pricing in check despite rising costs.

Streaming hours on Roku's platform clocked in at 73.2 billion, up 24.7% year-over-year, but the average streaming hours per active account for full-year 2021 declined to 3.6 hours, down 1.3% versus 2020.

The Roku Channel, Roku's content aggregation service that features free, ad-supported movies and TV shows (including some limited original content from Roku itself), continued to grow – it ended 2021 with an estimated reach of 80 million people and saw streaming hours over the full year. But Michael Nathanson, analyst with MoffettNathanson, believes that piece of Roku's business will be challenged as more original content starts to flow in to other streaming services.

Facing deep-pocketed rivals

Some analysts are concerned that Roku will be challenged to keep pace in the streaming game against the likes of Google, Amazon and Apple.

"In the most basic of terms, we believe Roku will have to win from here against rivals with bigger checkbooks, deeper teams of engineers, and better content," he explained in a research note (registration required) issued late last week.

Roku expects Q1 2022 revenues of $720 million, up 25% year-over-year.

Roku said supply chain disruptions are expected to continue in 2022, with overall TV unit sales expected to remain below pre-pandemic levels. That, in turn, could hinder Roku's ability to drive account growth. Roku also warned that delayed advertising spend could likewise continue in 2022, but still expects total net revenue growth to be about 35%.

Roku shot down any thoughts that it might travel a path taken by Vizio and attempt to open up a new revenue stream by selling some of its data.

"We view that data as basically a key part of our ad platform and a key competitive advantage," Anthony Wood, Roku's CEO, said on the earnings call.

"Data is our most valuable asset, so it's not something we sell," added Scott Rosenberg, VP and GM of Roku's Platform business, who is stepping down this spring. "It's also obviously the wrong move from a consumer perspective."

Where's the bottom?

It's not yet clear when Roku's stock will stop its decline. "Given the lack of clear valuation support here, we believe the stock will likely hit a bottom when the equity value gets low enough for rumors of an accretive takeover to be considered possible," Michael Nathanson, analyst with MoffettNathanson, explained.

He sees Roku's primary streaming platform rivals – Amazon, Google and Apple – as the most likely bidders if it gets to that point, but isn't sure any of them would be willing to risk an antitrust challenge at this point. Comcast, which has developed a global streaming platform for its set-tops, streamers and a new lineup of smart TVs in the US and in Europe, has previously been tossed into Roku M&A speculation.

Given that scenario, Nathanson expects Roku's stock "will likely be orphaned until earnings revisions turn positive and, given the outlook here, that feels like a long time from now." In the wake of Roku's Q4 results, the analyst cut his target price on Roku shares to $100 (from $135) and kept his "Sell" rating.

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— Jeff Baumgartner, Senior Editor, Light Reading