Is Roku a Buy on the Dip?

Shares of Roku (NASDAQ: ROKU), tanked about 25% during the week that ended Feb. 16, 2024. Investors were responding to another quarterly earnings report that was full of good news and not-so-good news from the television streaming platform provider.

On one hand, the number of active accounts and the amount of time users spend in front of the tube are up. A disappointing decline in demand for digital ads, though, led to lower revenue per user.

Roku’s still losing money, but those losses are narrowing. Is this contentious stock one you want to buy on the dip, or is it still too risky?

The good news from Roku

Last September, Roku announced a 10% workforce reduction, and the effects have been huge. Total fourth-quarter operating expenses declined 12% year over year to $542 million.

So far, it seems the staff Roku let go weren’t critical to the company’s expansion efforts. The platform ended 2023 with 80 million active accounts, which was 10 million more than it had a year earlier. That made it the company’s biggest year for new member additions except for 2020.

Televisions with the Roku operating system (OS) outsold all others for the fifth year in a row in the United States. It’s still early, but so far the company’s international expansion through Roku-enabled television sales is succeeding. In the fourth quarter, the Roku OS was No. 1 in Canada and Mexico.

The U.S. market is becoming saturated, but international expansion could keep fueling member growth at its present pace for another decade. During the fourth quarter, the company launched new Roku TV models throughout Central America and the U.K.

Roku isn’t just selling more devices. The amount of time each of those devices spends streaming video is also on the rise. Total streaming hours rose 21% to 29.1 billion during the fourth quarter.

Reasons to remain cautious

Roku reported average revenue per user that shrank 4% year over year. At $39.92, though this company should be able to make ends meet. Instead, management reported a net loss of $78 million in the fourth quarter of 2023 and expects to lose another $90 million in the first quarter this year.

If you’re wondering how a company with an asset as valuable as Roku OS still can’t make money, it’s largely because management spends shares of the company’s stock as if they grow on trees.

Roku trimmed its staff to just 3,150 at the end of 2023. Stock-based compensation finally stopped expanding, but at a whopping $370 million, it was still more than Netflix, a company with over four times as many employees, reported last year.

is roku a buy on the dip?

ROKU Total Employees (Annual)

Paying each of your employees an average of $117,500 in stock-based compensation is one way to retain top talent from year to year. That said, it’s an unacceptable sum for a business that isn’t generating a profit yet.

Roku is losing too much money to buy back any of the new shares it’s been creating. As a result, its outstanding share count has risen 29% over the past five years. A rising share count makes it a lot harder for patient investors to realize a strong return on their investment.

The company forecast a net loss of $90 million in the first quarter. That’s significantly less than it lost in the previous-year period but more than it lost in the fourth quarter of 2023.

A buy now?

Roku’s CEO, Anthony Wood, has been at the helm since he founded the company 22 years ago. He was certainly the right leader to achieve scale but that happened at least a few years ago.

It’s long past time for Wood to step aside or at least get serious about achieving sustainable profitability. Since he’s also chairman of Roku’s board of directors, it probably won’t happen until he’s ready.

Roku’s scale makes this a stock to keep an eye on, but that’s all for now. If your risk tolerance isn’t unusually high, I’d hold off on buying this one until there’s new management or recurring profit.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Roku. The Motley Fool has a disclosure policy.

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