The bargain bin is shrinking as the S&P 500 rises 9% this year to an all-time high. When investors hesitate and prices drop, inexpensive stocks flood the market. You must calm your anxieties and believe in the market to invest when the market is down. Warren Buffett famously advised investors "to be fearful when others are greedy and to be greedy only when others are fearful."
Roku's streaming model is unique. Roku sells devices and streams content. It's the top streaming OS in the US, Canada, and Mexico. That means more people buy its streaming devices and create accounts on its platform than Amazon and its competitors. Devices include streaming screens and internet-connected devices, and Roku's platform business largely advertises its free channels.
The 2023 fourth quarter had strong performance from both segments. Platform revenue, 84% of total revenue, up 13%, while device revenue rose 15%. As expected, the platform sector has greater margins whereas the device segment has gross losses.
The larger platform segment has helped total gross margin rise 2.5 percentage points year over year to 44.5% in the fourth quarter. Results were less positive near the bottom. Roku's annual operating loss reduced 58% to $104 million in the fourth quarter, but it's still high.
Long-term thesis is appealing. Roku will benefit as more viewers switch from cable and broadcast to streaming. Nielsen said that broadcast TV viewing hours declined 16% year over year in the 2023 fourth quarter, while Roku's grew 21%. Roku's fourth-quarter streaming hours per active account per day were 4.1, up from 3.8 in 2022 and 3.6 in 2021. The U.S. averaged 7.5 hours of broadcast TV per day in the fourth quarter, but Roku's share is growing and should continue.
These data are crucial because advertisers track viewers to maximize budgets. Roku's sales are affected by that. U.S. people aged 18–49 spent over 60% of their viewing time on streaming in 2023, but advertisers spent only 29% of their TV ad budgets on it. Roku has a huge growth opportunity in that gap.
Roku stock down—why? Roku's net profitability is slow. Roku briefly declared net earnings early in the pandemic when streaming suddenly took off, indicating it may become viable at scale. Despite growing numbers, Roku hasn't scaled without raising costs. Management's spending reduction aim is progressing.
Despite a strong earnings report, investors dropped Roku shares. The first quarter revenue projection was 14% year over year, but management does not expect adjusted EBITDA after two quarters in the black. Gross profit should rise 9.6% over previous year, and net loss should be $90 million. That's a tremendous improvement over last year's $190 million loss, but it's still considerably beyond 2022's $23 million loss and far worse than 2021's $76 million profit.
Just days later, Walmart said it would acquire Vizio, a smaller but competing operating platform. That deal was presumably designed to compete with Amazon's advertising business, but putting Walmart's name behind a competitor's name made investors dislike Roku. Overreaction, I think. The Vizio acquisition shouldn't affect Roku much since it competes with Amazon. The current price-to-sales ratio for Roku stock is 2.5. That's cheap for a promising stock. Take advantage of the slump and buy Roku, the future of TV and streaming.
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