When Roku (NASDAQ: ROKU) released its second quarter results last week, it scared investors a bit when management highlighted some supply chain issues that arose.
Shortages of materials and certain logistical constraints are evident everywhere as companies go through difficult times. These issues are a big part of why the stock price fell later in the week, even after Roku’s report showed the operator of the video streaming platform topped estimates for revenue and profits.
Supply chain problems will persist
Importantly, Roku reports revenue and gross profit from two segments: Player and Platform. The gamer segment mainly consists of devices that people buy to access the Roku platform. The platforms segment is where the company generates the bulk of its revenue and profit. For example, in the last quarter the gross profit of the platforms segment was $ 345 million, while the net profit of the gamers segment was negative.
Still, gamers are essential for Roku as this is how it attracts new viewers to its platform. This is probably why Roku is happy to sell players for little or no profit, to attract new accounts. However, management made two comments in the company’s second quarter earnings announcement on August 4 that suggest it will have to sell these players with increasingly negative margin in the near term:
“Within the Player segment, we expect global supply chain constraints and component cost increases to worsen in the second half of 2021, leading to an increase in negative player gross margin. that these industry supply chain constraints and cost increases for [original equipment manufacturers (OEM)] partners will continue until 2022. ”
“Player unit sales in Q2 2021 were relatively stable year-over-year, following increased demand in Q2 2020. Tight component supply conditions and shipping constraints continued to increase costs faster than expected in all categories of consumer electronics. In the second quarter, we isolated consumers from the increased costs for Roku gamers, causing gamer gross margin to turn negative in the quarter. ”
This is in stark contrast to the previous four quarters, where the company made a total gross profit of $ 48 million from the sale of its players. In the second quarter, the company reported a segment loss of $ 6.7 million and says the losses will worsen in the coming quarters.
What this could mean for investors
Despite the short-term supply chain challenges, Roku’s excellent growth prospects remain intact. The company reported 81% revenue growth in the second quarter and an increase in gross profit of 130% compared to the same period last year.
People continue to shift their viewing to streaming from linear television. As proof of this trend, in the second quarter, hours spent watching content on Roku devices increased 19% from the previous year, while consumption via linear TV fell 19%. The direction of this change is unlikely to reverse anytime soon.
Investors may view the decline in the Roku share price as an opportunity to buy the share at a lower price. That being said, be prepared for continued volatility over the next few quarters as the business grapples with supply chain disruptions.
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