Why Wall Street Has Vastly Diverging Views About Roku

Analysts disagree on how long its flagship media player can stand out in a crowded streaming space amid an unpredictable ad market and now a lower-margin push into home TVs

Despite ballooning operating losses (nearly $250 million) and an advertising downturn, Roku’s stock soared a day after it reported fourth-quarter earnings on Feb. 15. The rally came as the number of active users picked up to 70 million (from 61.3 million in Q1 2022) and the Anthony Wood-led firm beat revenue expectations for the quarter. Roku also promised to tighten expenses moving forward, with a plan to reach positive adjusted earnings before interest, taxes, depreciation and amortization in 2024.

But, longer term, Wall Street’s view on the stock remains mixed, depending on how much belief there is that Roku can maintain its place as a key gatekeeper in the streaming landscape with its media player. A team of analysts at investment bank Evercore noted Feb. 16 that

Roku has an outsize exposure to the scatter ad market (ad slots held back during upfront sales), which has been pressured over the past few months, and has not been able to benefit from political or sports ad spending, which has helped other ad-based businesses.

Roku gave weaker-than-expected guidance for the next quarter, but many analysts believe the company is being conservative, with Wells Fargo analyst Steven Cahall writing in a Feb. 16 note, somewhat optimistically, “The ad market in Q1 sounds like it’s neither getting worse nor better.” A Guggenheim research team led by Michael Morris regarded Roku’s account base as “valuable” but noted, “We struggle to value the business given the inconsistency of results relative to guidance and the cautionary macroeconomic tone cited by management.”

The positives for Roku going forward include the company’s plan to moderate expense growth (a plan that only those bullish on the stock believe in), the fact that Roku Channel is seeing increasing engagement (with streaming hours up more than 85 percent from the prior year) and its shoppable advertising partnership with Walmart. Also a plus is the company’s hiring of three new executives last fall, including former CEO of Fox Entertainment Charlie Collier, who is now leading Roku’s ad and content business and is known for doing more with less. “We believe Roku can leverage its advantages in pricing and merchandising to remain the market leader in consumer-facing connected television solutions,” wrote a team of analysts at investment bank Oppenheimer, which is relatively bullish on the firm for Wall Street.

But taking a decidedly downbeat view on the stock, Moffett-Nathanson analysts forecast Feb. 16 that Roku may be negatively impacted by the larger pressures facing streaming companies. The stock had been artificially propped up by the streaming wars, these experts argue, which led all the major media giants to spend on content and marketing in pursuit of subscriber numbers. This benefited Roku’s platform and advertising business. But now, the tides have turned as companies such as Disney, Warner Bros. Discovery and AMC Networks look to cut spending.

Roku’s latest revenue push takes it away from those pressures, as the company unveiled plans in January to manufacture its own branded TV sets. However, Moffett-Nathanson analysts see the plan to manufacture, rather than continuing to partner with outside companies, as weighing on the profit margins. Pivotal Research Group’s Jeffrey Wlodarczak also expressed “serious reservations” about the company’s move into home devices, adding: “The bottom line is that the outlook remains choppy for Roku going forward.”

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