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Why Did Roku Stock Slip Over 10% This Week?

Motley Fool - Fri Feb 23, 3:02PM CST

Shares of Roku(NASDAQ: ROKU) sank over 10% this week, according to data from S&P Global Market Intelligence. The TV streaming platform continued to fall despite broad market gains after Walmart inched closer to buying competitor Vizio Holding(NYSE: VZIO). It doesn't help that Roku just posted poor earnings for the fourth quarter of 2023, either.

As of this writing, shares of Roku are off 87% from all-time highs and are currently under $65. At one point in 2021, Roku stock was above $400.

Walmart's troubling play

Roku makes money by selling internet-connected TVs and advertisements through its operating system. It has 80 million active accounts and is considered one of, if not the largest streaming TV operating systems in the United States. Revenue sharing with streaming subscriptions and advertising led the company to generate just under $3.5 billion in sales last year.

The problem is, selling TV hardware is a cutthroat business, driving Roku to sell its hardware devices at negative gross margins (meaning below the cost of goods sold). Now, it looks like this competition is intensifying, with Walmart purchasing Vizio for $2.3 billion. Walmart says it is making the deal for Vizio's advertising technology as it tries to build its own advertising unit to compete with Amazon. Walmart is one of the largest sellers of Roku hardware in North America and will now be competing directly with the company by selling Vizio devices.

Clearly, this tie-up has made Roku investors nervous, with many selling their stakes this week.

Profitability worries will continue

Even before this Vizio news, Roku was struggling. In 2023, it had close to $800 million in operating losses while just growing revenue from $3.13 billion to $3.48 billion. In the fourth quarter, revenue grew only 11% year over year.

There is a huge opportunity for companies like Roku. Tens of billions in TV advertising will shift from legacy providers to streaming services in the next few years. Earlier during the pandemic, investors were extremely optimistic these dollars would flow through Roku. But now there are a lot of concerns those dollars will skirt past Roku and go to Walmart, Netflix, and Alphabet's YouTube instead. If Roku keeps growing at such a slow rate, these concerns are probably going to be proven correct.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Netflix, Roku, and Walmart. The Motley Fool has a disclosure policy.