Roku is Sliding Deeper Into a Catastrophe

Bears on Roku (NASDAQ: ROKU) have been persistent in their attacks on the company’s stock over the last year.

After a brief respite following the announcement of its Q3 earnings, the bears have resumed their assault.

As a result, ROKU has dropped roughly 25% since our last piece, trailing the S&P 500‘s 4% decrease but it isn’t all.

ROKU has also plunged far below its COVID lows, thus erasing nearly three years of gains and more.

As a result, ROKU’s YTD drop of more than 80% and over 92% from its 2021 highs is nothing short of a slaughter and a colossal failure.

We acknowledge that our ROKU thesis did not play out as planned, since it was mercilessly torn apart by the bears.

We expected ROKU buyers to play ball in order to prevent further declines, but buyers have continued to fall by the wayside as bears refused to enable the bulls to make a prolonged comeback.

As a result, those that remain are likely to be the diamond hands who still feel that CEO Anthony Wood and his staff will pull off a miraculous turnaround in 2023. However, with its adjusted EBITDA not expected to be profitable until 2023, it is likely to be a popular target for short sellers, as short interest as a percentage of float has risen to 8.6% but could these bears be pushed to flee quickly? Unlikely.

Ad Spending Is Likely to be Low, and Roku May Lose Market Share

Why? The digital advertising market may remain stagnant in 2023, as corporations continue to slash ad expenditure in response to a deteriorating economy.

With a recession on the horizon, underperforming enterprises like ROKU are unlikely to escape undamaged unless they commit to considerable cost-cutting efforts to reduce OpEx.

While management stated on its last earnings call that it will be more disciplined with its OpEx cadence by focusing on “high potential projects,” we feel the market is expecting more.

However, we believe that the company’s desperate need to maintain its market share may mean that its hands are bound as competition in the CTV streaming arena heats up.

In a recent analysis, KeyBanc Capital Markets stated that Roku’s issues go “beyond economic malaise.” It emphasized that Roku was hurt harder than competitors, saying that “the discrepancy in Roku’s growth vs. peers signals share loss.

Is this correct? We can’t ignore The Trade Desk’s (TTD) considerable gains in Connected TV (CTV) as the top independent demand-side platform (DSP).

So, something appears to be wrong with Roku’s problems, as its rapid expansion has slowed.

According to recent eMarketer predictions, Roku will likely lose market share in the CTV arena in 2023, dropping to 9.5% (from an expected 10.1%) in 2022.

Despite the fact that Hulu and other competitors are also anticipated to lose market share, their businesses are profitable.

As a result, even though its latest incursion has met with some early missteps, Netflix (NFLX) is projected to capture a share in the CTV area.

A Severe Recession Could Exacerbate Roku’s Problems in 2023.

As a result, we believe the market’s continued thrashing of ROKU could signal that the company may need to continue pouring in investments to maintain its market dominance, even if it means expanding its unprofitable cycle.

Elon Musk, CEO of Tesla (TSLA), warned investors that we could be in a severe recession in 2023, affecting discretionary spending much more.

As a result, ad expenditure could be reduced even further, affecting Roku’s estimates even further.

As a result, the market has most certainly priced in a considerably lower Q4 card, implying that Roku may miss its previous guidance.

Takeaway

So, the question is, should investors bail out now?

If you haven’t fled yet, you are most certainly among the unenviable group of diamond hands who anticipate Wood to lead the company to a profitable comeback in the medium future.

Otherwise, given the tech and growth bear markets, it may be preferable to take the fall and move on to another opportunity in a year rife with them.

However, remember that ROKU’s valuation has plummeted as the bears piled on their wagers.

With such widespread pessimism, a rebound cannot be ruled out, which is why a Buy recommendation is maintained.

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