Wall Street Sees Rocky Road Ahead – The Hollywood Reporter

Roku was particularly hard hit by a slowdown in advertising, which also hurt other ad-dependent companies such as Snap and Meta. The slowdown hurt Roku’s second-quarter revenue and caused the company to withdraw its full-year guidance due to the uncertain economic environment.

To compensate for its margins under pressure, the Roku, led by Anthony Wood, said on July 28 that it would slow its hiring rate and cut operating expenses. This includes its spending on content, most of which is third-party licensing, but which also includes investments in its Roku Originals channel. (“Spending will be commensurate not only with the scale and growth of The Roku Channel, but also with the broader macroeconomic environment,” was the measured statement in the company’s earnings release.)

These are some of the only levers the company can pull, analysts say, pending an improvement in the broader economy. The previous quarter created something of a perfect storm for Roku, according to MoffettNathanson analyst Michael Nathanson. “Roku’s Q2 2022 results were the sum of all our concerns,” he wrote in a July 29 note.

Nathanson worries that Roku’s numbers, like those of other companies, were boosted by consumer demand for video streaming during the pandemic and supported higher ad spend in 2021. But, as the second quarter showed , Roku’s advertising, which is easy to disable and so on, seems more susceptible to a recession than traditional TV advertisers. At the same time, the company faces competition on three fronts, writes Nathanson.

There’s Amazon, Alphabet and others in the connected TV space, increasing competition between traditional streaming companies and, soon, a battle for ad dollars with Netflix and Disney+, after the two platforms will launch their ad-supported streaming tiers next year. This, in addition to ongoing ad issues, will likely mean Roku’s stock will be under pressure in the near term.

Yet for many analysts, the bad news doesn’t change their long-term view of the company’s prospects. On the one hand, media giants Netflix and Disney’s entry into ad-supported streaming could help lure more advertisers into the linear TV streaming space, CFRA analyst Kenneth Leon wrote in a July 29 note. (The company also made this point in its recent earnings call.) Still, CFRA analysts downgraded Roku from “hold” to “sell” and lowered its price target from $70 to $57.

Guggenheim analysts, who lowered Roku’s price target to $70 from $115, offered a more bullish view in a July 28 note: “We share management’s favorable view of the long-term CTV opportunity (note that Roku has surpassed $1 billion in initial commitments), but I believe the company needs to show a return to profitable growth to renew investor interest.”

And, even acknowledging that last quarter’s results “will likely shake already shaken investors,” the Wells Fargo analyst Steven Cahall sees the stock price ($75.71 per share as of the close of business Aug. 2) as an attractive entry point ahead of the expected connected television (CTV) boom. “This is a shock to the stock as CTV was seen as a secular growth advertising channel and therefore should have proven less volatile and/or gained share in a recessionary environment,” Cahall wrote. “While it may come later in this cycle, in the short term, it looks like marketers are cutting budgets on CTV because they can.”

Cahall added, “For those with the ability to weather an advertising recession, this could be a great post-recession price for Roku.”

A version of this story appeared in the July 27 issue of The Hollywood Reporter magazine. Click here to subscribe.

Karen J. Nelson