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Roku: Not So Good Under The Hood

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There was plentifulness of cheer aft Roku (NASDAQ:ROKU) released its earnings. Expectations were debased and nan institution did not really person a precocious barroom to group for its earnings. At its lowest point, nan banal had been down much than 90%, truthful this twelvemonth it was astatine a shape wherever immoderate news was bully news. Its net served conscionable that. It highlighted nan summation of nett caller accounts giving it much than a 15% summation from past twelvemonth (YE subscribers astatine 70M). Streaming hours accrued by almost 20% from past twelvemonth (YE streaming hours astatine 14.3B hours). But erstwhile I started digging deeper location were aggregate signs that not everything is what it seemed and successful my constitute up I will effort to deconstruct their net narrative.

Peeling backmost nan narrative

While maturation successful streaming hours and an summation successful subscriber numbers look good, successful nan discourse of Roku it still hasn't helped nan institution successful position of numbers that really matter. Total nett gross from Q4 2022 only accrued by 0.2% from nan comparable quarter! Its full nett gross for Q1 2023 is guided down to $700M and for nan aforesaid 4th past year, it made $733M. So this begs nan mobility - How are each nan increases successful subscribers and nan increases successful streaming hours helping?

You tin make nan statement that nan platform's gross has shown immoderate maturation but it's conscionable not capable to apprehension nan diminution successful revenues from devices which are down 18% from nan comparable quarter.

Margins

ChartData by YCharts

Although their gross margins started improving successful 2021, it has declined for nan past respective quarters. Their operating margins are astatine nan lowest they person ever been! When you look deeper, you recognize their Sales and Marketing walk is up 82% and makes up much than 30% of their revenues! This intends they are spending much and much dollars connected trading but not having overmuch to show for it.

ChartData by YCharts

Adjusted EBITDA

When nett losses are widening, companies edifice to this made-up metric to show things successful a affirmative light. First of all, you return your net and remove/exclude everything that matters (i.e. taxes, depreciation, etc.). On apical of that, you portion much things till you get astatine a number that looks decent and that is called Adjusted EBITDA.

Not only did their nett losses widen, but their adjusted EBITDA is besides antagonistic and increasing! I americium not judge what nan constituent of adjusted EBITDA is anymore.

Income and Adjusted EBITDA - financials

Income and Adjusted EBITDA (Company website)

Diworsifying and Buzz words

From their net merchandise -

In Q4, we launched caller smart location products to build caller work gross streams. This merchandise offering includes cameras and video doorbells that connection subscription plans enabling users to position unreality recordings of nan videos, on pinch AI-based alerts (e.g., person, package, vehicle, pet). Similar to our TV streaming model, we scheme to build scale pinch our devices, past monetize done smart location services, which we expect to go a very ample market.

Diworsification is simply a word popularized by Peter Lynch to definitive regret complete nan truth that definite companies task into domains that are importantly chopped from their superior operations, starring to their eventual downfall. I neglect to spot really smart location products are related to their halfway business. Also, this is simply a domain already crowded by nan large players (Ex: Google (GOOG) (GOOGL)) and I don't cognize really Roku plans to compete here.

"AI" is nan caller buzzword that has caught up pinch nan market. Just a twelvemonth earlier, it was blockchain and from nan advent of ChatGPT, nan word "AI" has sewage a caller lease of life. When companies edifice to utilizing buzzwords for perfectly small logic I commencement to distrust them more. I still retrieve nan clip erstwhile detecting persons, package, etc. was called sensor-based alerts.

They talk astir building standard pinch their caller devices similar to nan streaming exemplary and nan past clip I checked, this is what standard meant. From Investopedia -

Definition of scale

Investopedia

But we already saw their financials and I could spot small grounds of their "scale". So I again neglect to spot nan intentions down these statements.

Shareholders backing their growth

Date Stock Based Compensation to Revenue
2022-12-31 12%
2021-12-31 7%
2020-12-31 8%
2019-12-31 8%
2018-12-31 5%
2017-12-31 2%

ChartData by YCharts

The banal has been diluted massively since its IPO and if we person to link nan dots present connected really their business is still operational without profitability and widening losses, nan reply seems easy. The grounds supra indicates that their maturation has been progressively coming astatine nan disbursal of shareholders.

Final Call

Wrapping up, I complaint this banal arsenic a beardown sell:

  1. As an investor I consciousness I person amended uses for my money sloppy of nan communicative that is painted by nan company. At nan extremity of nan day, nan financials speak for themselves
  2. Trading astatine 3 times Price to Sales nan banal is not inexpensive either.
  3. I americium not assured of their imagination and skeptical astir nan guidance they are taking their business.

This article was written by

Shri Upadhyaya floor plan picture

I person a heavy seated passion for investing and I americium ever connected nan lookout for opportunities that are nether appreciated and astir complete looked. Most of nan celebrated adages of investing sound bully to nan ears but are not practical. The only point that matters is drawdown and CAGR. As specified I creation my portfolio to person minimal drawdown and protect finance astatine nan guidelines lawsuit script but maximize CAGR connected nan astir optimistic scenario. In my hunt for opportunities I springiness nary respect to nan fame of nan banal and alternatively trust connected my ain intelligence and study to make my decisions. This has served maine good passim my investing travel of nan past 8 years and I dream my activity benefits my readers arsenic well!

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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