Roku May Post Widest Loss in Three Years as Ad Spending Dries Up

Roku Inc. (ROKU), among the top eight entertainment platforms in the U.S. by app downloads, probably swung to a loss in the third quarter as recession and inflation fears prompt a pullback in digital advertising.

Roku probably lost $1.24 per share, the widest since the second quarter of 2019, compared with a profit of 48 cents a share a year ago. Revenue growth is likely to have slowed to just 4% from 50% a year ago, according to average estimates from Visible Alpha.

Roku depends on ad sales that have been pummeled by a cooling economy, rising interest rates and accelerating inflation. Other tech companies have been similarly affected, prompting Netflix Inc. (NFLX) to launch a version of its platform with ads in coming weeks. While Roku's products are used to stream Netflix, analysts don't expect Roku to reap benefits of an uptick in ad sales for the new platform.

Also key to ad revenue is Roku's total number of active accounts, which gauges the size of the company's user base. More subscribers mean more people that will see ads, making the platform more attractive to advertisers. Analysts predict Roku's active accounts will reach 64 million, an all-time high that also represents slowing growth relative to recent quarters.

Shares of Roku plunged starting late in 2021 and have drifted further downward in the last quarter. The company's stock dropped 83% in the last year relative to a decline of 16% for the S&P 500 Index (see chart below).

Roku Earnings History

After years of struggling to post consistent profit, Roku reported six consecutive quarters of positive profits starting in Q3 2020. It reversed that trend in this year's first two quarters, swinging to losses that analysts expect widened anew in the third quarter.

The company posted robust revenue during the initial stages of the COVID-19 pandemic. After reaching its fastest pace in the first quarter of 2021, growth probably slowed by the most pace in at least six years in the third quarter.

^{Source: Visible Alpha}

The Key Metric

Roku defines active accounts as the number of distinct user accounts that have streamed content on its platform within the past 30 days of the period. The company doesn't distinguish between unique individuals streaming content on the same account, though active accounts are still closely correlated with the number of viewers, and thus the potential reach for advertisers.

Active accounts have been slowing since late 2018, despite the pandemic-era uptick. Analysts predict that third-quarter growth was less than a third the pace of growth two years ago.