By most measures, it was a solid first quarter. The top and bottom lines improved year over year, and both rolled in above analysts' consensus estimates. The company expanded its active customer base, too, and collectively, those customers increased their usage of the product.
And yet, Roku (ROKU 2.06%) shares are down to the tune of 8.6% as of 12:36 p.m. ET Friday, reflecting investors' frustration over the streaming technology company's revenue outlook and waning profitability.
Here come the headwinds
For the first quarter, Roku turned revenue of $881.5 million into a loss of $0.35 per share. Both of those were improvements on the year-ago period, when it booked $741.0 million in revenue and lost $1.38 per share. Analysts on average had been predicting sales of $848.6 million and a loss of $0.62 per share. The company also upped its active-user headcount to 81.6 million, and those users collectively watched 30.8 billion hours of streaming programming. These metrics were up 14% and 23% year over year, respectively.
The future, however, doesn't look quite as bright. Although Roku's revenue guidance of $935 million for the second quarter was better than analysts' consensus expectation of $931.4 million, management anticipates that further down the road, its results could prove relatively lackluster. "Looking ahead, we face difficult year-over-year growth rate comparisons within streaming service distribution activities," founder and CEO Anthony Wood noted in his Q1 letter to shareholders.
Translation: The premium-streaming market's highest-growth days are in the past.
That won't necessarily be catastrophic for Roku. People are still watching as much television as they ever have. They're just watching more ad-supported and free-to-watch streaming content, which plays into Roku's hand. Its own free, ad-supported channel is drawing an ever-bigger share of U.S. viewership, according to TV ratings agency Nielsen.
The ad-supported/free-to-watch streaming business model tends to produce markedly lower per-user revenues, though, and Roku's average revenue per user (ARPU) may have already peaked. At $40.65 per household in Q1, the metric has been sliding from its mid-2022 high of $44.01. Since that time, Roku's gross profit margin rates for its advertising business have also dwindled from more than 60% to a figure closer to 50%. This suggests the company has a pricing-power problem, a cost problem, or a combination of both.
Roku stock is risky, but the reward may be worth it
These challenging fiscal trends are concerning, to be sure. But it should be noted that nothing about Roku's contracting profit margins or stagnating ARPU was entirely unexpected, nor are the problems insurmountable. These weaknesses are largely a function of the company's size and age, and the ongoing maturation of the streaming market. Roku is still successfully doing the most important thing for its business -- bringing more users into its ecosystem, where they're watching more and more streaming content.
There's certainly above-average risk in buying Roku stock. However, with its share price down by nearly 90% from its 2021 high, the potential upside justifies the risk for those who can stomach it.
