Conversations on Wall Street and similar economics-focused circles have reached a near-Talmudic level of obscure and technical complexity: Are we in a recession after two quarters with negative GDP growth? Will last week’s Fed interest-rate bump kill inflation? Will it set off that recession? What will the next rate hike do? What does it mean that we keep adding hundreds of thousands of new jobs?
No one’s even sure if we’d actually know we’re in a recession until we’re pretty much out of it. Nowhere was that more evident than this week, where tech giants Alphabet, Apple, Microsoft, and Amazon (which all have significant ad-based or streaming units) collectively reported a 24% drop in quarterly profits, and still saw share prices jump. Even Netflix shares are up more than 30% in the past month after an ugly first half of the year.
Meanwhile, Roku missed too, and saw its shares get hammered, dropping 29%, after a long, brutal decline the past year.
Pivotal Research principal and senior analyst Jeff Wlodarczak cracked that Roku might be “Broku” after reporting "a frankly awful 2Q and 3Q guidance as it appears our main concern around the company suddenly hit them like a freight train.”
That’s despite what should be a bumper-crop season for video ad sales for the biggest streaming platform in the United States, especially with mid-term election spending, and the imminent arrival of both Disney Plus and Netflix ad-supported tiers, with the many tens of millions of customers who likely will eventually use both.
Roku even reported it had more than $1 billion in Upfront ad commitments, a record for the company as it continues to build out its Roku Channel ad-supported service.
And eMarketer projects that ad-supported streaming audiences in general will grow 9% this year, to 140 million. More importantly, they’ll attract a growing share of view time and revenues, which are projected to rise 33% to almost $19 billion in 2022.
Theoretically at least, that all should make for good times at Roku, especially as people start looking for something free to watch.
Except, not. Wolfe Research analyst Peter Supino was one of many who turned what seemed like good news into bad, downgrading Roku stock to “underperform” in part because of all that new ad-supported inventory on highly desirable platforms that it will be carrying.
Supino’s argument is basic supply and demand; more supply depresses prices. And “rather than expanding the pie,” all those high-end newcomers could simply “push dollars away from non-premium categories,” especially if overall ad spending doesn’t keep growing.
Also read: Roku Back Up 10% as Wall Street Shrugs Off Dumb Narratives
Analysts, who traditionally have struggled to understand Roku’s business, piled on. A host of them dropped targets for the company’s share prices to somewhere less than even the current $65. Just a year ago, those shares neared $450.
So two questions present: Are the analysts right about Roku prospects in a downturn? And are those concerns relevant to prospects for everyone else in the sector, especially smaller companies?
Wells Fargo media analyst Steven Cahall quoted Roku’s own investor letter in saying the problem is a suddenly seized-up scatter market. Marketers now worry that the possibly looming recession will bring a lot less consumer spending, so they’re spending a lot less to reach those consumers.
Unlike cable TV, connected TVs are “less sticky,” Cahall suggested. Basically, customers are less invested especially lower-end shows, and thus less likely to consistently watch it. Plus, they have way more options these days.
“This is a shock for the stock because (connected TV) 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.
So maybe he’s right. Maybe Roku is semi-secretly a mess, given its U.S. focus and the challenging transition from dongle-maker to OEM interface licensor. Sell the stock while you can. But what does this mean for other purveyors of “non-premium ad programming?
The weird thing here is that being recession proof was supposed to be one of the big benefits of the ad-supported Roku Channel and its several major competitors.
The industry’s received wisdom is that in times of economic stress, cheaper content like what appears on the Roku Channel, Amazon’s Freevee, Pluto TV, Tubi, STIRR and the rest tends to get watched more, as people cancel premium channels to conserve cash. Folks still need to fill the time, and can’t afford to go out, so ad-supported TV should thrive.
Of course, this theory hasn’t been truly tested in the Streaming Wars era.
We had 12 years of fast-growing markets, amid which the Streaming Wars coalesced as broadcast and cable distribution began its cord-cutting collapse. The rapid transformation to streaming was super-powered by the pandemic’s early months of lockdown, then settled into a seemingly permanent higher level of consumption.
Now, as we circle a possible bona fide economic decline (maybe), we’ll get to see if the received wisdom from previous eras has any basis in this one.
Are people really watching less “non-premium” as they feel the pinch of inflation, higher credit-card payments, more expensive car/home loans, and brutal gas prices?
If they’re watching more while advertisers are spending less, how long does that mismatch continue? If people aren’t buying anything, no sense buying ads, especially if they won’t get seen, because no one is watching.
But if the eyeballs are turning more and more to the Roku Channel, Freevee, Tubi, Pluto TV, et al, brands and marketers are making a particularly dopey mistake, just as they started moving billions of dollars to streaming from legacy outlets.
We’re about to embark on the first true test of what happens to the streaming industry when the economy sucks. It should be fascinating to watch, though I’m betting a lot more people will be tuning into Roku Channel, Tubi, Freevee, etc., in coming months. Chalk this one up to another case of Wall Street overreaction to a business it still doesn’t quite understand.
One final note: for all the gloom in Roku’s quarterly report, the company did note that growth in the number of active users of the platform reaccelerated in Q2. As my beloved editor said, that’s the metric that counts.
