Roku: Management Searches for a Path to Profitability With Further Cost Reductions
Raising Roku stock’s fair value estimate to account for improved operating leverage.
Roku Stock at a Glance
- Fair Value Estimate: $75.00
- Morningstar Rating: 3 stars
- Morningstar Economic Moat Rating: None
- Morningstar Uncertainty Rating: Very High
Roku Stock Update
Roku ROKU announced it will make additional cuts to adjust its cost structure, including its third round of layoffs in less than a year. The cuts will also include office space consolidation, a review of its content portfolio, and reduced use of outside service. As a result, Roku expects to incur impairment and restructuring charges ranging from $260 million to $330 million, with the vast majority recorded in the third quarter.
The company also issued more detailed third-quarter revenue guidance of $835 million to $875 million, implying year-over-year growth of 10%-15%. We are raising our fair value estimate to $75 from $70 to account for improved operating leverage in 2024 and beyond.
The impairment costs for Roku from the reductions are expected to break out as follows: $160 million-$200 million for office facilities consolidation, $55 million-$65 million for content removal, and $45 million-$65 million for the workforce cuts. The reduction is expected to affect 10% of Roku’s workforce, or around 340 employees. The first two rounds of layoffs in November 2022 and March 2023 each resulted in 200 job losses.
We believe the firm will remain vigilant about its cost structure as investors continue to view a path to profitability, combined with top-line growth, as more important than simply collecting users. We also think that these cuts will largely hit unpopular programming that was likely driving little to no revenue. Like its larger streaming peers, Roku is trying to focus on the content that drives the most usage rather than simply padding its content library.
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