Roku Q2 Reaction: A High-Growth Company Falls From Grace

Roku logo Q2
Cheyne Gateley/VIP+

At this point in the Q2 earnings season, it’s not surprising that most companies, media included, are being impacted pretty strongly by the macroeconomic environment. It was much of the same story for streaming company Roku. 

But compared to other media companies that have recently reported Q2 results and future guidance, Roku did not shy away from casting much of the blame on the macro situation for its woes in Q2 and the foreseeable future. So much so that it spooked investors and sent Roku stock down 25% in the after-hours trading session Thursday. 

It opened its shareholder letter saying “In Q2, there was a significant slowdown in TV advertising spend due to the macro-economic environment, which pressured our platform revenue growth. Consumers began to moderate discretionary spend, and advertisers significantly curtailed spend in the ad scatter market (TV ads bought during the quarter). We expect these challenges to continue in the near term as economic concerns pressure markets worldwide.” 

Leading into Roku earnings, expectations weren’t necessarily high, but the company painted a very different picture of the state of its business just a month ago. In an interview with CNBC at the Cannes Lion Festival, CEO Anthony Wood stated with conviction, “Our ad business has been growing like gangbusters.” So, it’s understandable that investors were somewhat confused when there seemingly was a dramatic turn of events in just the past month.  

Perhaps to Roku’s defense, that’s because the company is extremely exposed to macroeconomic conditions, even more so than some of the others in the space. Roku’s core platform business, which includes digital advertising revenue, is the main driver of its top-line growth. Unfortunately, Roku only logged 18% year-over-year revenue growth and now predicts just 3% growth in Q3.  

And as we all know by now, ad spending has plummeted recently, as companies pull back on categories like marketing and advertising. Several other digital media players have confirmed that much. On top of that, Roku’s player segment, which includes hardware sales like TVs, has been struggling with supply-chain disruptions. Then, there’s the overall streaming growth slowdown as of late.  

But all this boils down to the curse of being a high-growth company that can no longer deliver high growth levels like it used to. Sure, the macroeconomic circumstances are certainly not making it easy, but when you go from growth rates in the 50 to 80 percent range suddenly back down to under 20% and even a forecast of 3%, there is a period of adjustment for investors.  

There are so many questions about the future of Roku and whether it will be able to withstand the rollercoaster ride ahead, but at least Wood believes that “temporary economic cycles do not change the long-term opportunity in streaming.” 

Whether or not investors buy what Wood is selling is a different story.