Shares in streaming video pioneer Roku (NASDAQ:ROKU) were on a roll through 2020 and much of 2021. On July 26, ROKU stock closed at $479.50 — a new all-time high. That worked out to a 12-month return of 217%. However, the picture hasn’t been pretty for investors since then. Roku shares have slumped and currently trade for under $370. That’s down 23% from their July high. And that is despite the company reporting record revenue growth last week. What’s going on with ROKU, and is this slump a buying opportunity or a portent of worse to come?
Multiple factors are converging to put pressure on ROKU. This Portfolio Grader “B” rated stock is facing challenges related to loosening of pandemic restrictions, that ever-present global semiconductor shortage, and big moves by a dangerous competitor. Here’s a look at what’s been going on.
ROKU Stock Earnings
On August 4, Roku delivered its second-quarter earnings. There was a lot for investors to like. Total revenue hit $645 million, with year-over-year growth of 81%. That topped analyst expectations. Earnings per share of 52 cents blew past expectations of 13 cents. In addition, platform revenue was up 117% YoY. It crossed the half a billion dollar threshold for the first time ever, hitting $532 million.
Despite what looks to be a pretty impressive quarter, ROKU stock dropped further.
Hardware Margins Continue to Shrink and Streaming Viewership Down
One of the reasons for the negative reaction was the company’s hardware division. That’s where the chip shortage comes into play. As noted in the company’s shareholder letter:
“Tight component supply conditions and shipping constraints continued to increase costs faster than expected across all consumer electronics categories. In Q2, we insulated consumers from increased costs for Roku players, which resulted in Player gross margin turning negative in the quarter.”
While hardware sales were relatively flat for the quarter, eating the additional expense for chips was costly. The gross margin for hardware dropped from 13.8% in Q1 to -5.9% in Q2.
In addition, with lockdowns easing and consumers venturing out for entertainment, the number of hours spent streaming on Roku’s platform dropped by 1 billion hours compared to Q1.
TCL Drops Roku in Favor of Google
Worse news was yet to come. Roku has been in a fight with Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google in 2021.
Google has been a distant competitor to frontrunner Roku for years. In terms of streaming media players, Roku devices now outsell Google’s Chromecast in the U.S. by a nearly four-to-one margin. In addition, Roku has had tremendous success in growing its user base by licensing the Roku OS to TV manufacturers. Each of those smart TVs then becomes a Roku device, able to contribute to the company’s platform growth.
However, last fall, Google decided to take another run at growing their TV platform. Google TV is a video streaming platform with a user-friendly interface and remote control support that replaces Android TV.
Google’s fight with Roku kicked off in April. The company yanked its Google Play Movies & TV app off Roku’s platform. Earlier this week, things got much more serious. TCL — the Chinese TV manufacturer that has been a big part of the Roku smart TV licensing surge — dropped a bombshell announcement. Its new 5 series and 6-series TVs will be running Google TV instead of Roku OS.
As I wrote in July, 38% of smart TVs sold in the U.S. last year were running Roku OS. That kind of penetration is a critical driver of platform revenue, and the reason why we don’t get worried about Roku’s hardware business. Google has turned its sights on this market and it’s going after the long-time segment leader in a big way.
Bottom Line on ROKU Stock
The effect of the global chip shortage and a bounce back to pre-pandemic video streaming viewing habits were predictable. And they are not a huge worry in the long-term for Roku.
Having Google nipping at its heels is cause for concern, but I’m not panicking. TCL was careful to make the message clear that it will continue to sell TVs running Roku OS alongside those Google TV versions. And when it come to Google TV, the company tried this a decade ago and eventually gave up. There’s no guarantee Google TV will fail a second time, but Roku has many fans, momentum, and a huge lead over its much larger adversary.
ROKU stock is a little riskier these days as a result of the company’s challenges. However, I still think there’s a good chance that when this all shakes out, Roku is still in the driver’s seat and thriving. Those who agree will see the current weakness in ROKU stock as an opportunity. Count the investment analysts surveyed by CNN Business in that camp. They currently have ROKU rated as a consensus “buy” with a median price target of $486.50, for 35% upside.
On the date of publication, Louis Navellier had a long position in GOOG and ROKU. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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