Wall Street says Roku needs to get its story straight

Roku shares closed just under $55 per share on Wednesday. Six minutes later, the stock was below $42 in after-hours trading. What's up?

The short answer is its third quarter financial report… only Roku actually exceeded internal and external expectations for the third quarter. Sure, Roku lost a lot of money — $122.2 million, a loss of 88 cents per share — but tech companies often do. Either way, that counts as a win as analysts were expecting a loss per share of around $1.28 or $1.29. Roku also outperformed other metrics: EBITDA (earnings before interest, tax, depreciation, and amortization), revenue, active accounts, ARPU (average revenue per user), and hours watched.

The real problem lies not with Roku's Q3 past, but with its Q4 future: The holiday season doesn't look particularly jolly and bright for the device maker and channel house Roku . Roku expects macro factors such as inflation and a looming recession to "put additional pressure on consumers' discretionary spending and dent advertising budgets." For a company that makes devices that allow consumers to access their ad-supported streaming platform, that's not good news.

“We expect these conditions to be temporary, but it is difficult to predict when they will stabilize or rebound,” the third quarter report continued. In other words, suppress your expectations for the fourth quarter, if not more. Roku expects revenue from its players and platform to be lower than in the fourth quarter of 2021. The company also acknowledged that it overhired and overinvested in late 2021 and early 2020. 2022, as she “believed the economy was emerging from pandemic-related disruptions.”

Roku now expects total net revenue of $800 million (from $865 million in Q4 2021), total gross (non-net) profit of $325 million (from $380 million) and Adjusted EBITDA of -$135 million (from a gain of $86.7 million).

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Shweta Khajuria of independent investment banking advisory firm Evercore ISI has some questions. In one report, she questioned whether Roku intentionally made overly conservative estimates that could easily be beaten. This is the optimistic take; as an alternative, the company's business model may be "structurally altered".

“We believe these are some of the former, and very few of the latter,” she wrote. Khajuria previously downgraded the stock in July to be "in line" with the market; its target price is $55, the pre-Q3 earnings mark. Evercore ISI will "stay on the sidelines" until advertising, particularly the broadcast market (ad inventory remaining after initial agreements), recovers. This will take a few quarters, at least, Khajuria wrote.

Moffett Nathanson cut his own price target from $44 to $38, so they think the stock still hasn't bottomed. They also believe that the c...