Digital media company Roku (NASDAQ: ROKU) has been struggling with profitability in recent quarters. While the business has been growing thanks to the rising popularity of streaming services, the company has incurred a loss of more than $100 million for five consecutive quarters. The losses, however, have been shrinking.
Could another round of job cuts be what Roku needs to get back into the black? And what should investors do?
Last week, Roku announced that it was going to reduce its workforce by approximately 10%, or about 300 people, in a bid to save money. The company has previously cut jobs in March and November. In both of those instances, Roku cut approximately 200 jobs.
Investors reacted positively to the recent news as it was a sign that the company was making a serious effort to improve its bottom line, which simply hasn’t been strong. Over the trailing 12 months, Roku has incurred net losses totaling $660.6 million.
Roku, like many companies during the early stage of the pandemic, experienced significant growth only for things to end up slowing down last year. And as that happened, the company’s earnings deteriorated and went from being firmly in the black to being deep in the red.
ROKU Net Income (Quarterly) data by YCharts.
The cost reductions do appear to be having a positive impact on Roku’s bottom line. But the most recent job cuts won’t be “substantially complete” until the end of the current fiscal year. That tells investors that it could still be a few more quarters before all the cost savings flow through to the company’s bottom line.
For the third quarter, which ends in September, Roku projects that its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss will be between $20 million and $40 million. That’s an improvement from its prior forecast of $50 million. Previously, Roku was forecasting that its adjusted EBITDA would be positive in 2024, and these job cuts could accelerate that goal.
There can, however, be large deltas between adjusted and unadjusted earnings. For the period ended June 30, Roku’s net loss was $107.6 million, but its adjusted EBITDA loss was only $17.8 million as the company backed out $89.6 million worth of stock-based compensation plus $18.5 million in depreciation and amortization. Due to those relatively high expenses, I’m not overly optimistic that Roku will be able to get back to true, unadjusted profitability next year.
Plus, there’s another reason Roku’s earnings might suffer — its margins are shrinking. Roku has been pivoting to hardware recently. It’s making its own TVs and smart home devices. While that’s a good way to find new growth opportunities, that hardware revenue will come at the cost of lower margins.
The company’s platform and ad revenue have helped allow Roku to be profitable in the past as strong margins there have offset weak (and sometimes negative) margins from its devices. But as the company shifts more toward hardware, its overall gross margin, which has already been declining, could shrink even more.
ROKU Gross Profit Margin (Quarterly) data by YCharts.
Roku’s stock has more than doubled in value this year as growth stocks have become hot buys again in 2023. It has the potential to be a good buy in the long run as it has the free Roku Channel to attract viewers. The company’s platform is agnostic when it comes to streaming services, so it can benefit from a rise in streaming even as people change subscriptions.
But it may be a bumpy ride for the company over the next year as Roku establishes a new normal where, with a greater focus on hardware, its margins will be smaller. Finding the right balance between achieving profitability and pursuing new growth opportunities will take time.
Investors may want to wait and see how long it takes for the company to get back to profitability before buying the stock, as the company isn’t out of the woods just yet, and it still has a lot of work to do in order to get back to breakeven.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.
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