#327: Roku’s Recent Earnings May Have Disappointed, But We Believe Its Long-Term Opportunities Should Delight, & More

Roku made headlines this week after it missed both revenue and earnings estimates for the second quarter. Management withdrew full-year revenue guidance, citing a slowdown in the growth of advertising budgets and a pullback in consumer discretionary spending, and lowered guidance for third-quarter revenue growth to 3% on a year-over-year basis.

In our view, the third-quarter guidance is conservative, as Roku reported more than $1 billion in ad commitments during this year’s upfront selling season, representing approximately 16% of upfront CTV ad spend and 5% of total upfront ad spend. The difference between its revenue guidance and upfront results suggests that Roku expects either little-to-no revenue from the scatter market during the next year and/or a prolonged accounting impact from lowering estimates of their clients’ lifetime value (LTV).

Despite the disappointing quarter and weak guidance, we believe Roku’s long-term growth story remains intact, particularly because consumers continue to adopt CTV and abandon linear TV. During the second quarter, Roku’s total active accounts increased to 63 million, or 15% on a year-over-year basis, an acceleration from 14% in the first quarter. Total hours streamed also grew 19% year-over-year to 21 billion, while average platform revenue per user increased 21% to $44.10 on a trailing twelve-month basis.

Although macroeconomic headwinds are compelling advertisers to tighten their ad budgets, we believe CTV advertising should continue to grow as consumers abandon linear TV. According to Nielsen, US consumers aged 18-49 spent 50% of total TV time on streaming during the second quarter, but CTV ad budgets represented only 22% of total TV ad budgets. In the May 2022 Interactive Advertising Bureau’s 2021 Video Ad Spend & 2022 Outlook survey, 76% of all respondents––and 87% of the largest media spenders––ranked CTV as the #1 must-buy for media plans, and 73% indicated that they expect a decline in linear TV ad budgets.

While macroeconomic conditions could continue to weigh on Roku’s short-term financial performance, our outlook for Roku’s growth potential remains robust. As the #1 streaming platform by hours streamed in the US, Canada, and Mexico, Roku should continue to lead the advertising shift from linear to digital TV.

For further information, please see our recently published open-source Roku valuation model and associated research article. Roku is a leading television operating system and hardware provider that distributes various streaming platforms to millions of households globally.

Aspiring to reach millions of users, the blockchain world is trying to scale without sacrificing security or decentralization. Often criticized for its inability to scale, Ethereum supports only 15 transactions per second, which is much lower than the transaction demands on the network and at times has been the cause of prohibitively high fees. As Ethereum’s core developers have been focused on the upcoming Merge, application developers building on top of Ethereum have been tasked to solve the scalability problem.

At the recent Ethereum Community Conference (EthCC) in Paris, teams from Polygon, zkSync, and Scroll showcased their progress on a key scaling milestone: zero-knowledge rollups. Rollups increase a blockchain’s throughput, first by compressing data from many transactions off-chain, and then by posting the batched output to the blockchain. The two main types of rollups that live on Ethereum––optimistic rollups and zero-knowledge rollups (zkRollups)––have brought scalability but also suffered from considerable drawbacks. Optimistic rollups delay the withdrawal of funds from the rollup for several days, while existing zero-knowledge rollups support limited transaction types and require a bespoke programming language.

New work on display at EthCC suggests that zkRollups are becoming more compatible with Ethereum. Despite technical differences in the solutions showcased, the new generation of zkRollups will allow developers to leverage existing Ethereum tools––like Metamask, the popular digital wallet––and port their existing smart contracts to the rollups without making significant code changes.

Although these EVM-compatible and EVM-equivalent rollups are important breakthroughs for zkRollups, they still need to perfect the decentralization of off-chain transaction sequencing. That three teams are competing to solve this challenge suggests the wisdom of Ethereum’s strategy: let the market solve the scaling problem.

Last week, Verve Therapeutics (VERV), a technology-agnostic gene editing company, and Vertex Pharmaceuticals (VRTX), a small molecules company, announced a strategic partnership to discover and develop an in-vivo gene-editing therapy for liver disease. Vertex will pay Verve $60 million upfront, including an equity investment of $35 million, and up to $340 million in development milestones and royalties as well as $66 million in success fees.

In our view, this partnership is exceptionally interesting, as Vertex already has several partnerships and collaborations with gene-editing companies like CRISPR Therapeutics (CRSP) and Mammoth Biosciences. Now we know that Vertex believes Verve will execute quickly and efficiently, just as it did in its first clinical program, VERV-101, which knocks out the PCSK9 gene to lower blood levels of LDL cholesterol––bad cholesterol––for the treatment of heart disease. While historically Verve has focused on cardiac indications, this deal signals that its technology might apply to many organs and diseases. We look forward to learning what other indications the collaboration will include.