Yahoo Finance Roku stock falls 8% after Wall Street analyst warns of more ad market 'softness'
Roku stock (ROKU) slid 8% on Wednesday after a Wall Street analyst warned softness in the ad market will continue to impact the company's earnings through the end of the year.
In a new note released Tuesday night, Wells Fargo analyst Steve Cahall lowered his price target on shares to $70 from $84, citing concerns the fourth quarter "could see softness from ad trends."
"We heard at our Advertising Day last month that scatter remains weak quarter-over-quarter, while Roku will also face a reduction in media and entertainment spend due to the ongoing Hollywood strikes," Cahall wrote. Scatter refers to ad inventory that isn't purchased during upfront sales.
The analyst added that although Roku likely has more upfront inventory in Q4 compared to last year "it's unclear how upfront pricing compares both year-over-year and to current scatter since this year's TV Upfronts occurred amidst a weak ad environment."
Cahall said he expects softer fourth quarter guidance as a result, anticipating that revenue per streaming hour will fall 8% year over year in Q4 compared to an estimated 4% annual drop in Q3.
The analyst also cut his estimates for Q4 platform revenue by 1% to $780 million — 3% below consensus expectations — meaning total revenue would be $929 million, a 7% year-over-year gain but still 3% below Wall Street projections.
That lower overall revenue would also hit gross profits with the analyst expecting $379 million in fourth quarter profits, 6% below the Street.
Roku stock is down about 17% over the past three months but has soared more than 50% since the start of the year.
In Roku's second quarter results, brand advertising remained pressured as total US advertising came in flat year over year. Spending on traditional TV fell 9.4% while traditional TV ad scatter sank 17.2%.
At the time, management warned the Hollywood strikes would continue to negatively impact media and entertainment spending through the back half of the year — a notable challenge given the heavy promotions Roku provides for content.
To combat some of these hurdles and bring down operating expenses, Roku revealed a slew of cost-cutting measures last month, which included layoffs.
The company said it would be eliminating 10% of its workforce, or 300 jobs, in addition to slowing down its pace of hiring. The announcement marked Roku's third round of layoffs in less than a year after it cut 200 jobs in March 2023 and another 200 in November 2022.
Excluding charges related to items such as severance and the removal of select content from its streaming platform, Roku said it expects third quarter net revenue in the range of $835 million to $875 million, with adjusted EBITDA in the range of negative $40 million to negative $20 million. This is ahead of its previous Q3 forecast for revenue of roughly $815 million and adjusted EBITDA of negative $50 million.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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