Benchmark analyst Daniel Kurnos reiterated Roku Inc
Roku represents an interesting conundrum - still incrementally tied to traditional TV ad budgets and direct sales channels but poised to benefit from the opening of the DSP later this year while also being on the cutting edge of innovation in the recent digital upfronts, along with logging new meaningful partner wins.
The analyst suspects the former and the continued drumbeat of planned marketing spend reductions at the networks could mute any near-term revenue outperformance and probably lead to a recurrence of the same questions around relative growth, even if he believes the wrong comparisons are being made.
Alternatively, the analyst thinks the latter has further solidified Roku's importance within the ecosystem and set the Company up to accelerate growth in 2024 and beyond, even if the ad market recovery remains uneven.
Most importantly, however, Kurnos believe that messaging around a shift in investment strategy to focus on leverage remains underappreciated, with the probability of a free cash flow inflection significantly increasing within the next 12-18 months.
The most common adjective the analyst heard to describe the current state of the ad market is "choppy." As he published in his state of TV media note on July 5, CTV appears to be seeing a modest CPM rebound towards flattish from down mid-singles in 1Q. However, programmatic has failed to see any meaningful recovery YTD.
Alternatively, national advertising remains slump, with only marginal improvement expected Q/Q.
In the short-term, the vast majority of their business continues to be transacted via manual insertion orders and direct negotiated channels, which have proven incrementally resilient in his latest round of checks, with agencies also commenting that, perhaps surprisingly, TV overall will be one of the first areas to recover once the ad market gets incremental clarity on the economy and the now two entertainment strikes taking place simultaneously.
The bad news, of course, is that near-term revenue performance seems unlikely to reaccelerate until 4Q barring some category outperformance (auto could be an incremental helper) or ancillary help from either new partner wins or prior initiatives, with additional pressure coming from well-communicated softness in the M&E vertical.
The analyst is modestly above the Street for the next three quarters on platform revenue expectations but generally in line overall for the year. Kurnos was previously ahead of the Street in 2024 but now finds effectively matching consensus; however, he suspects his forecast could prove conservative, especially from a margin/EBITDA standpoint, with his current forecast already projecting a return to FCF positive in 4Q24.
Ramping retail media spending through shoppable ads, a growing programmatic business through the opening of the DSP, flow through from the recent digital upfronts, successful player growth from TV launches, and cost-effective content acquisition could all conspire to drive top-line outperformance as well despite the expected investment pivot.
Price Action: ROKU shares traded higher by 3.13% at $76.34 on the last check Monday.
