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Roku's (ROKU 1.21% ) stock sank 23% to its lowest level in over three years after its second-quarter earnings report on July 29. The streaming device and software company's revenue rose 18% year over year to $764 million but missed analysts' estimates by $40 million. It also posted a net loss of $112 million, compared to a net profit of $73 million a year ago, while its net loss of $0.82 per share came in $0.13 below the consensus forecast.

Let's talk about Roku's unsightly quarter, why it's been struggling, and if its stock is worth buying after losing nearly 90% of its value over the past 12 months.

Roku's growth accelerated during the pandemic as people stayed at home and streamed more media. But as governments around the world eased the lockdown measuresures, Roku's growth decelerated against difficult year-over-year comparisons.

As that slowdown occurred, Roku's hardware business grappled with rising component costs and supply chain disruptions. Those headwinds also hurt its platform business, which generates most of its revenue from integrated ads, as companies (especially in the auto and consumer packaged goods sectors) reined in their marketing expenses to counter those rising costs.

But despite all those challenges, Roku's active accounts and average revenues per user (ARPU) both continued rising on a sequential and year-over-year basis over the past year. Its streaming hours dipped sequentially in Q2 but still improved from the previous year.

Data source: Roku. YOY = Year-over-year.

But in terms of revenues, the growth of Roku's platform business continues to decelerate, while its player revenues have declined for four consecutive quarters.

Data source: Roku. Millions of USD. 

During the conference call, CEO Anthony Wood said Roku struggled with a "significant slowdown in TV advertising spend due to the macroeconomic environment" during the quarter. He also said the company would face an "increasingly difficult and uncertain environment" in Q3 as "recessionary fears, inflationary pressures, rising interest rates, and ongoing supply chain issues" continue to affect its platform and player businesses.

As Roku's top-line growth slows down, its gross margins are contracting both sequentially and year over year.

The platform business's declining gross margins largely reflect its waning pricing power in the weakening advertising market. That contraction is troubling because Roku relies on its higher-margin platform revenues to offset the player segment's low margins.

Roku had already been selling its players at razor-thin margins throughout the pandemic to widen its moat against Amazon's Fire TV, Alphabet's  Android TV, Apple TV, and other set-top box makers, but the ongoing supply chain disruptions forced it to absorb its rising costs and take losses on its players.

At the same time, Roku has been ramping up its spending on new original content for its ad-supported Roku Channel. That combination of slowing revenue growth, contracting gross margins, and rising operating expenses has been toxic for its bottom line.

Data source: Roku. Millions of USD. 

During the conference call, CFO Steve Louden warned that the "second half operating environment will be increasingly challenging." Louden expects Roku's platform margins to stabilize sequentially but for its player margins to continue sliding as it insulates consumers from higher costs.

Louden also withdrew Roku's previous full-year guidance for 35% growth due to "too much macro uncertainty." Analysts had expected its revenue to rise 32%. Based on those estimates, which might still be too optimistic, Roku's stock looks fairly cheap at just over two times this year's sales.

Roku isn't down for the count yet, but its stock could continue to slide until it stabilizes its revenue growth and losses. It might look cheap now, but it could still get a lot cheaper over the next few months.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Alphabet (A shares), Amazon, and Apple. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Roku. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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