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Roku Faces Uncertain Future Due to Advertising Slowdown

Photo from RokuPlayer’s Instagram

Roku Faces Uncertain Future Due to Advertising Slowdown

By Movieguide® Contributor

The advertising slowdown has impacted Roku, hurting the company’s second-quarter revenue and causing it to pull its full-year guidance due to the volatile economic environment.

In a letter to shareholders, Roku said, “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.”

“Spend will be commensurate not only with the scale and growth of The Roku Channel, but also with the broader macro environment,” explained the company’s earnings release.

This means that Roku will slow its hiring rate and pull back on operating expenses, including content spending and investment in the Roku Original channel.

According to MoffettNathanson analyst Michael Nathanson, “Roku’s 2Q 2022 results were the sum of all our worries.”

He explains that Roku’s numbers, like other companies, are elevated due to pandemic consumer demand, and its advertising, which can easily be turned off, appears “more susceptible to a recession than traditional TV advertisers.”

Additionally, competition between streaming services continues to increase.

Amazon, Alphabet and others have increased competition among traditional streaming services, while Netflix and Disney+ will soon battle for ad dollars when they launch their ad-supported tiers next year.

The Hollywood Reporter reports, “the entrance of media giants Netflix and Disney into ad-supported streaming could help bring more advertisers into the streaming space from linear television,” which could help Roku in the long run.

However, CFRA analysts have “downgraded Roku from ‘hold’ to ‘sell’ and lowered its price target from $70 to $57.” Likewise, Guggenheim analysts lowered Roku’s target price from $115 to $70.

“We share management’s favorable view of the long-term CTV opportunity, (note Roku surpassed $1bn in upfront commitments), but believe the company needs to show a return to profitable growth to renew investor interest,” Guggenheim analysts said.

Wells Fargo analyst Steven Cahall views Roku’s current stock price of $75.71 a share at the close of business on August 2 as “an attractive entry point ahead of an expected connected television (CTV) boom.”

“This is a shock for the stock because CTV was believed to be a secularly growing ad channel and thus should have proven less volatile and/or gained share in a recessionary environment,” Cahall wrote. “While that could happen later in this cycle, in the near term it looks as though marketers are cutting budgets on CTV because they can.”

While the unstable economic environment has played a role in the decreasing stocks, the entertainment industry’s increased push for immoral content has pushed many viewers away from supporting streaming platforms.

Movieguide® previously reported on Disney and the entertainment industry’s economic struggles due to immoral content: 

Despite Disney+’s aspirations to hit 230 to 260 million subscribers by 2024, Wall Street fears that recent economic woes will hit entertainment companies hardest.

Wall Street Multiples for the Hollywood mainstay Walt Disney Co. dropped by 41% over in the past year, the lowest number posted by Disney since 2018—barring pandemic-era markets—according to The Wrap.

“The fact that Disney is trading at $110 is stunning, it’s hard to believe,” Jessica Reif Ehrlich, a senior U.S. media and entertainment analyst at Bank of America Securities, said. “As the market collapses, multiples collapse. We are in that period of it being doom and gloom.”

“Disney’s fiscal second-quarter results were largely positive although management commentary on second-half Disney+ net adds are likely to be a key concern among investors,” Ehrlich wrote in a recent report called ‘A Multiverse of Moving Parts.’ “While Disney+ net adds of 7.9 million beat our 5 million forecast, management indicated second-half net adds will not be significantly higher than in the first half.”

The decline in market value is not unique to Disney’s streamer, as Netflix also reported a loss of subscriber growth in Q1.

Despite the economic turmoil faced by all companies in 2022, Disney’s recent vocal stance on promoting LGBTQ+ messages in their children’s content also negatively affected their market value.