Roku Inc experienced a meteoric surge in its stock price, soaring as much as 14% in early trading on Wednesday. This unexpected surge followed the company’s announcement of a series of cost-cutting measures, including layoffs and a slowdown in hiring, all aimed at reducing its operating expenses. The streaming giant unveiled these initiatives in a regulatory filing released Wednesday morning.
As part of its efforts to streamline operations, Roku declared its intention to eliminate 10% of its workforce, equating to approximately 300 jobs. Concurrently, the company plans to halt its recruitment activities. The decision comes as a strategic response to ongoing economic challenges, particularly the Hollywood strikes, which have disrupted the media and entertainment industry.
Excluding charges tied to severance packages and the removal of select content from its streaming platform, Roku has revised its third-quarter net revenue expectations. The company now anticipates a range between $835 million and $875 million, accompanied by adjusted EBITDA figures between negative $40 million and negative $20 million. This guidance revision surpasses Roku’s previous third-quarter forecast, which projected revenue at approximately $815 million and adjusted EBITDA of negative $50 million.
Financial analysts reacted to the surprising guidance raise with optimism. JPMorgan, for instance, reaffirmed its “Overweight” rating on Roku stock. Analyst Cory Carpenter stated in a note on Wednesday, “We (& investors) initially thought Roku’s 3Q revenue guide was conservative, but a 7% increase (at the high-end) two months into the quarter was certainly not expected given the ongoing Hollywood strikes. We believe the revenue increase was in part driven by continued improvement in ad spend across verticals Roku called out as showing green shoots in the first half of the year (i.e., CPG, health/wellness, & travel), a positive read-thru for the online advertising group.”
In its second-quarter results, Roku faced challenges in brand advertising, with total US advertising remaining flat year-over-year. Concurrently, spending on traditional TV fell by 9.4%, and traditional TV ad scatter, representing ad inventory not purchased at the Upfronts, plummeted by 17.2%. Management had previously warned that the ongoing double strike in Hollywood would continue to negatively impact media and entertainment spending throughout the latter half of the year. This presented a notable hurdle considering Roku’s significant involvement in content promotion.
However, Wells Fargo analyst Steve Cahall expressed a positive outlook on Wednesday, emphasizing the potential for revenue growth alongside Roku’s cost-cutting initiatives. Cahall suggested that estimated adjusted EBITDA for 2024 could witness a substantial boost, stating, “We think implied adjusted EBITDA could exceed $300 million for ’24E [versus] Wall Street’s $64 million estimate.” He reiterated his “Equal Weight” rating and maintained a price target of $84 per share.
In summary, despite grappling with the ongoing Hollywood strike, Roku is making commendable strides in trimming operating expenses while continuing to innovate its streaming services. With this optimistic outlook resulting from the company’s cost-cutting endeavors, Roku and its investors are now more hopeful about achieving a more profitable future, exemplified by the recent surge in Roku stock.
Source: Yahoo finance