It's been a rough few trading days for streaming TV company Roku (ROKU 3.51%). The growth stock has been hammered since last week's earnings report, declining about 30%. This is a big setback to what started to look like a recovery in its stock price last year when shares rose 125%. A rough start to 2024 means the stock is still floundering at levels far below where it traded in years past; shares are down 85% over the last three years.
So, what gives? Why are investors moving on from this beaten-down tech stock? It boils down to fears about its well-capitalized competition. Investors are concerned that aggressive investment in the connected-TV space from deep-pocketed tech companies like Apple, Amazon, Alphabet, and now potentially even Walmart (WMT +0.99%) could make the operating environment increasingly difficult for Roku.
NASDAQ: ROKU
Key Data Points
Persistent losses
Perhaps providing clues to the competitive environment, Roku has consistently reported losses on an annual basis. Its total net loss in 2023 exceeded $700 million, or $5.01 per share. This is worse than the company's $3.62 loss per share in 2022. Further, the company said it expected a $90 million loss in the first quarter of 2024.
Intense competition from tech giants much bigger than Roku could be one reason the company has had trouble becoming profitable. In fact, to maintain its lead in the intensely competitive market, the company generally operates its devices business at a loss. Indeed, its gross profit margin for device sales in the fourth quarter of 2023 was negative 13%.
Some analysts have also been expressing concerns about increasing competition. Pivotal Research lowered its 12-month price target on the stock from $85 to $75 after the earnings report, noting that intensifying competition leaves little upside for the stock. MoffettNathanson analyst Michael Nathanson said in a note to investors after the earnings report that the company appears to be getting "squeezed by the emergence of challengers on all flanks."
And then there's the fact that the advertising economic environment isn't necessarily out of the weeds. Roku management said in the company's fourth-quarter earnings call that the recent ad market recovery has been "uneven." Further, management said it remains "mindful of the near-term challenges in the macroeconomic environment." If the economic outlook worsens, particularly in the U.S., advertisers could pull back and Roku's losses could widen.
Walmart wants in on CTV, too
Worsening the narrative for Roku after an earnings report that disappointed investors last week, retail juggernaut Walmart announced on Tuesday morning it has agreed to acquire smart TV operating system maker Vizio (VZIO +0.00%). The company, which also sells smart TVs and other streaming TV devices, is a direct competitor to Roku.
"We believe Vizio's customer-centric operating system provides great viewing experiences at attractive price points," said Walmart CEO Seth Dallaire in the press release about the deal. "We also believe it enables a profitable advertising business that is rapidly scaling."
Walmart's move into the space would add yet another competitor with far more resources than Roku. The deal, of course, is subject to regulatory clearance and other closing conditions. But if it goes through, there's almost no way to spin this news as a positive outcome for Roku.
Overall, things look rough for Roku going forward. It's not surprising that shares have been getting hammered.
