Roku Might Not Benefit from Netflix Optimism

Investor optimism about an ad-supported subscriber tier at Netflix (NFLX) may not be enough to improve sentiment in Roku Inc (ROKU).  Shares of Roku have been in freefall, dropping to a 3-1/2 year low last Thursday and losing more than three-quarters of their value this year, the twelfth-biggest drop in the Russel 1000 Index. 

Since mid-June, Roku has dropped about -33%, while Netflix has risen almost the same amount. Netflix, which reports Q3 earnings results Tuesday, announced last week that it would charge $7 monthly for its new ad-supported service.  Netflix’s standard service, without ads, costs $15.49 a month in the U.S.  The new ad-supported service will give the company revenue from advertising, a source it previously had shunned.

Electronic media devices using Roku allow users to manage streaming services such as Netflix and Hulu. Roku sells ads for its own Roku Channel and splits some ad revenue with other services.  However, investors are wary that even if Netflix accelerates the shift to streaming as a destination for marketers, it may not be a meaningful earnings catalyst for Roku.

Roku cited a slowdown in television advertising when it gave a revenue forecast in late July that knocked the stock down -23%, the biggest drop in the stock’s history.  Wealth Consulting Group said, “there are significant challenges facing Roku at a time when the environment has become much harder for unprofitable stocks.”  Roku’s valuation has gone from a peak above $60 billion to $6.8 billion as investors fled unprofitable stocks in favor of cheap or dividend-paying companies.  Roku is now trading at 1.9 times estimated sales, well below its five-year average of 8.7.

Recent sentiment toward Roku has soured dramatically.  Analysts estimate that Roku will report a loss of -$3.06 this year, more than twice as wide as was expected three months ago.  The consensus for revenue has fallen 15% over the same period. However, Cathie Wood’s ARK Investment Management, the second-largest holder of Roku shares, is optimistic about the company’s earnings prospects.  ARK Investment Management said, “video advertising revenue is likely to be the most significant contributor to the company’s growth during the next five years,” and predicts Roku shares could climb to $605 during the next five years.

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