Roku (NASDAQ:ROKU) stock is plunging 15% after the company’s fourth-quarter guidance badly disappointed analysts and investors. The company blamed the weak guidance primarily on declining demand for TV ads.
Roku sells both an operating system and the accompanying hardware used to facilitate the transmission of streaming channels. The company’s offerings include fobs, tabletop devices, TVs, and even sound bars. However, most of its revenue is derived from advertising.
ROKU Stock: Disappointing Q4 Guidance and the Reasons for It
The company predicted that its revenue from the sales of its hardware devices would decline this quarter versus the same period a year earlier. This decline suggests that the demand for streaming TV is also declining.
On the ad front, Roku expects marketers’ spending to be negatively affected by “the macro environment.” Advertisers, including toy makers, are already lowering their spending on ads for the current quarter, Roku CEO Anthony Wood explained.
Wood added that:
“The first thing companies do in the face of such uncertainty is cancel their ad budgets Big advertisers that we traditionally get spend from are not spending this quarter.”
Roku provided Q4 sales guidance of $800 million, versus analysts’ average estimate of $895 million. The company predicted that its Q4 EBITDA, excluding certain items, would be $45.4 million, compared with analysts’ mean outlook of of-$45.4 million.
The Potential Implications for Disney and Netflix
The expected decline in Roku’s hardware sales could bode poorly for the subscriber growth of both Netflix (NASDAQ:NFLX) and Disney’s (NYSE:DIS) Disney+. Meanwhile, the weak ad market cited by Roku could indicate that the ad revenue of Disney’s TV channels and of its Hulu joint venture could decline. For Netflix, Roku’s bearish statement on ad spending could have negative implications for the ad-supported offering that NFLX is launching this week.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.