ADBE 2024 and Beyond Outlook: Overcoming Short-Term AI Hurdles for Long-Term Success

Adobe Inc. (ADBE), widely known for its multimedia and creativity software for content creation, photo, and video editing, recently reported financial results for the first quarter of fiscal year 2024, which ended on March 1, 2024. It posted revenue of $5.15 billion, beating analysts’ estimate of $5.15 billion. This compared to revenue of $4.66 billion in the previous year’s quarter.

Adobe achieved record revenue in the first quarter, showcasing solid momentum across its business segments. Digital Media segment revenue was $3.82 billion, up 12% year-over-year. Creative revenue increased to $3.07 billion, representing 11% year-over-year growth, and Document Cloud revenue came in at $750 million, representing 18% year-over-year growth.

Moreover, ADBE’s Net new Digital Media Annualized Recurring Revenue (ARR) was $432 million, exiting the quarter with a Digital Media ARR of $15.76 billion. Creative ARR increased to $12.78 billion, and Document Cloud ARR rose to $2.98 billion. Also, revenue from the Digital Experience segment was $1.29 billion, an increase of 10% from the same period last year.

Furthermore, the company’s non-GAAP operating income grew 15.8% from the year-ago value to $2.47 billion. Its non-GAAP net income rose 17.2% year-over-year to $2.05 billion. Also, Adobe reported non-GAAP net income per share of $4.48, compared to the consensus estimate of $4.38, and up 17.9% year-over-year.

Adobe’s cash flows from operations came in at $1.17 billion for the quarter. In addition, its enterprise strength drove the growth of Remaining Performance Obligations (RPO) by 16% year-over-year.



Adobe's remarkable first-quarter results and record RPO demonstrate robust uptake of its innovative products and services by customers. As a result of its solid trajectory of growth and profitability, the company declared a new share buyback program worth $25 billion. It underscores ADBE’s ongoing commitment to returning capital to its shareholders.

Bleak Second Quarter 2024 Guidance

While its first-quarter results beat estimates, Adobe presented a weak outlook for the second quarter of fiscal 2024 and opted not to update on full-year expectations. For the current quarter, ADBE anticipates total revenue ranging from $5.25 to $5.30 billion. The company expects a new Digital Media net new ARR of approximately $440 million, and Digital Media segment revenue is projected between $3.87 billion and $3.90 billion.

ADBE projects Digital Experience segment revenue and Digital Experience subscription revenue of $1.31-$1.33 billion and $1.165-$1.185 billion, respectively. The company also foresees non-GAAP EPS reaching between $4.35 and $4.40.

Challenges and Opportunities in the AI Landscape

ADBE has undergone a remarkable metamorphosis in the last decade, converting its desktop-based software such as Photoshop, Premiere Pro, Illustrator and Acrobat into cloud-based services. The company further enriched this ecosystem by incorporating an array of marketing, e-commerce, and even analytics services.

The Digital Media segment, encompassing Creative Cloud and Document Cloud, however, grappled with macro and micro challenges specific to the media industry. It faced currency headwinds and enhanced competitive pressure from Figma in the software User Interface (UI) market.

ADBE’s disappointing failure to acquire Figma for its potential was substantial. The Creative Cloud, in near-term scenarios, could have seen boosted revenue, and a significant competitor would have been eliminated. Contrarily, ADBE found itself paying a hefty $1 billion termination fee directly to Figma upon antitrust regulators thwarting the deal.

In an effort to counterbalance the aforementioned loss, the company is vigorously expanding its generative AI platform, Firefly. With Firefly’s assistance, designers can generate photos, videos and 3D models using minimal text-based prompts. Furthermore, it accelerates various tasks throughout both Digital Media and Digital Experience ecosystems.

Over the past year, Firefly popularized ADBE as a stock in the AI buying frenzy. However, it has yet to increase its digital media sales significantly. Exacerbating matters, ADBE still grapples with another probe from the Federal Trade Commission (FTC) in relation to its subscription cancellation policies.

During the fiscal year 2023, several macro headwinds impacted the company’s smaller Digital Experience segment, which is responsible for managing its other enterprise-facing cloud services. Additionally, currency headwinds hindered a percentage point of this segment's revenue growth.

CEO Perspective and Strategic Focus

Adobe is making noticeable progress across existing products and mobile tools and even introducing new innovative product offerings. An example is AI-powered Enhance Speech, an innovative tool that automatically dubs a video into a language selected by the user. It is an impressive addition to ADBE’s expanding suite of products and services.

Also, ADBE recently launched an AI assistant in its Reader and Acrobat applications that can produce summaries of and answer questions about PDF documents.

The company has clarified its focus on acquiring an extensive user base. The concept underpinning this strategy is that robust customer acquisition and retention will enable ADBE to monetize its users over time progressively. As a pioneer in the software-as-a-service (SaaS) business model, ADBE maintains fidelity by incorporating AI with traditional methodologies.

Working actively, ADBE is embedding generative AI across its entire product portfolio. It has already introduced this capability in Photoshop and Illustrator. Moreover, demonstrating a commitment to innovation, it plans to release a text-to-video creation product by the end of the year. Concurrently, the company has previewed an upcoming music generator product.

Chief Financial Officer Dan Durn mentioned that numerous projects are slated for release in the forthcoming months. Further, he emphasized that ADBE has merely initiated the process of capitalizing on its generative AI technology.

Moreover, a crucial aspect of the company’s latest earnings call highlighted Adobe CEO Shantanu Narayen's discussion on differentiating between experimentation and monetization within its platforms. Adobe is still in the process of determining which features and tools will resonate with users. Adobe needs to avoid investing billions in tools that either go unused by users or don’t justify future price increases.

The main challenge for Adobe lies in profit generation from AI. As a subscription-based company, Adobe must increase its customer base and revenue per user to support rising capital expenditures. This challenge is akin to what platforms like Netflix, Inc. (NFLX) face, where they must enhance their services’ value through quality content to justify price hikes.

During Adobe's latest earnings call, a shift in momentum was noted, along with the recognition that while new AI-powered applications have significant growth potential, this doesn’t guarantee an immediate impact on its short-term results.

Analysts' Changes to Price Targets

Stephen Bersey, an analyst at HSBC, has cited concerns over AI and noted disappointing guidance. Consequently, he reduced ADBE's firm price target from $557 to $511, a decision aligned with his unchanged hold rating on the shares. The investment company perceives ADBE’s competitive moat as being potentially threatened by AI.

Reportedly, some employees of the company also grapple with the threat of AI. In July, news emerged that a significant number of ADBE’s workforce perceived AI as an "existential crisis" for numerous designers.

Barclays reduced its price target for ADBE’s shares from $700 to $600 and maintained an overweight rating for the stock. Analysts stated that they anticipate the stock will recover and “would be buying this dip because pricing is masking the underlying strength in Creative Cloud.”

Further, JP Morgan cut the price target on ADBE from $600 to $570, maintaining a Neutral rating. Baird also slashed the price target on ADBE stock from $590 to $525, and its analyst Rob Oliver maintained a Neutral rating on the stock. Meanwhile, UBS analyst Karl Keirstead reiterated his Neutral rating on the stock and cut the price target from $600 to $540.

On the contrary, Brad Zelnick, an analyst at Deutsche Bank, reiterated his Buy rating on ADBE stock and set a price target of 650. He asserts that the emergence of competitive generative AI tools for images and video will benefit ADBE. As per Zelnick, creators will continue to require editing tools for these images and videos; hence, their indispensability remains intact.

Moreover, Mizuho Securities analyst Gregg Moskowitz predicts a second-half-yearly commencement for the company to profit from new product introductions and the growth in generative AI. With a price target set at 680, he maintained his Buy rating on ADBE stock.

Bottom Line

ADBE reported better-than-expected results for the first quarter of the fiscal year 2024; however, it issued weak guidance for the second quarter. The design software company expects earnings growth of 12% year-over-year and sales increase of 10%. That would be its third straight quarter of declining earnings growth and second consecutive quarter of slowing sales.

Investors and analysts are wondering when Adobe will see a boost from its innovations in generative AI. Some analysts raised concerns about the health of its Creative Cloud business and the pace of AI monetization. Also, the company is assumed to face a growth problem caused by a challenging macroeconomic climate and fierce competition from Figma, Canva, and other forms, among other factors.

Although Adobe’s new AI-powered product offerings have substantial long-term potential, it’s important to note that their impact on short-term results may not be immediate.

Nvidia vs. Netflix- Which Is the #1 Growth Stock to Buy in March?

With the S&P 500 soaring roughly 8% year-to-date, stocks have experienced a solid start in 2024, with investors reaping the rewards of putting their money in high-growth stocks. This positive momentum is expected to persist throughout the rest of the year and beyond.

Amid this market rally, chip giant NVIDIA Corporation (NVDA) and entertainment powerhouse Netflix, Inc. (NFLX) have emerged as beacons of growth, capturing investor’s bullish sentiment.

Although operating in distinct industries with unique business models, these titans share striking parallels in their journey to success. Their unwavering commitment to excellence, combined with strategic flexibility, has catapulted them to the forefront of their respective industries.

Therefore, let’s explore the fundamentals of NVDA and NFLX to unveil the ultimate growth contender of the month.

Last Reported Quarterly Results

In the fiscal fourth quarter that ended January 28, 2024, NVDA witnessed a staggering 265.3% year-over-year surge in its topline, totaling $22.10 billion. The company’s non-GAAP net income surged to $12.84 billion and $5.16 per share, marking a remarkable increase of 490.6% and 486.4% from the prior-year quarter, respectively.

As of January 28, 2024, NVDA’s cash, cash equivalents and marketable securities stood at $25.98 billion.

Conversely, for the fourth quarter that ended December 31, 2023, NFLX’s revenue rose 12.5% year-over-year to $8.83 billion. The company also experienced significant growth in net income and EPS compared to the previous year’s quarter, amounting to $937.84 million and $2.11, respectively. As of December 31, 2023, NFLX held $7.12 billion in cash and cash equivalents.

Growth Trajectory

NVDA, the reigning chip powerhouse, is currently one of the market's most sizzling stocks. Since its inception in 1993, NVDA has spearheaded cutting-edge computer chip technology, pushing the boundaries of graphics-heavy video games to unparalleled heights.

However, with the emergence of Artificial Intelligence (AI), these chips have swiftly ascended to newfound prominence, reflecting NVDA's enduring innovation and strategic adaptability. The company stands as a global giant in the production of Graphics Processing Units (GPUs) renowned for their ability to handle complex mathematical operations, powering captivating visuals across devices.

These advanced chips have become indispensable for training state-of-the-art AI programs such as ChatGPT and Gemini, underscoring NVDA’s pivotal role in driving the AI revolution forward. Leveraging AI to its advantage, NVDA’s earnings reports have managed to exceed expectations throughout 2023.

Furthermore, NVDA’s shares soared roughly 200% over the past year, buoyed by the company’s stellar earnings performance and solid demand for its AI chips. This surge attracted both institutional and retail investors, driving up share prices. With a market cap of around $2 trillion, NVDA has now claimed the title of the world's third most valuable company.

On the other hand, commanding a market cap of over $268 billion, NFLX stands as a pioneer in the streaming entertainment space, revolutionizing how audiences consume content worldwide. With a vast library of original programming and a global subscriber base, NFLX enjoys unrivaled dominance in the industry.

In a recent conference, NFLX’s CFO Spencer Neumann elaborated on NFLX’s trajectory under its revamped Co-CEO structure and its ambitious vision for future expansion. Neumann emphasized the smooth transition to the new leadership structure and NFLX’s dedication to broadening its entertainment repertoire, spanning films, TV series, gaming endeavors, and live content experiences.

Over the last few years, the tech company has adopted several strategic approaches to bolster its financial health. NFLX’s growth strategy hinges significantly on its substantial investment in content, with an annual expenditure projected at approximately $17 billion.

In addition, Netflix is venturing into new revenue avenues, including the introduction of an ad-supported subscription tier and measures aimed at bolstering monetization, such as combating password sharing.

Moreover, despite its risky move of cracking down on password sharing, NFLX’s latest earnings report revealed a surge of 13 million new subscribers in the final quarter of 2023, marking its most substantial growth since 2020. While initially met with resistance, the strategic move has been designed to counteract declining subscribership.

Greg Peters, NFLX’s Managing Director, emphasized during the earnings call that the company's top priority regarding ads is scalability. He highlighted a 70% quarter-on-quarter growth in the last quarter, following a similar growth trend in the previous quarter, indicating a positive growth trajectory for the company.

Competitive Landscape

In the dynamic worlds of technology and entertainment, both NVDA and NFLX are fiercely vying for supremacy in their domains.

The soaring popularity of generative AI owes a significant debt to NVDA and its groundbreaking GPUs. With skyrocketing demand and tight supply, NVDA's GPU H100 has emerged as a highly sought-after and premium-priced commodity, propelling NVDA to trillion-dollar status for the very first time.

With tech giants such as Microsoft Corporation (MSFT), Meta Platforms Inc. (META), OpenAI, Inc. (AMZN), and Alphabet Inc. (GOOGL) heavily relying on NVDA’s GPU chips to power their generative AI planforms, these companies have started developing their own AI processors.

In addition, NVDA faces stiff competition from other chip makers like Advanced Micro Devices, Inc. (AMD) and Intel Corporation (INTC), all striving to release the newest, most efficient, and potent AI chips to dominate the market.

Meanwhile, NFLX confronts fierce competition from fellow FAAMG (Meta (formerly Facebook), Apple Inc. (AAPL), Amazon, Microsoft, and Alphabet’s Google) heavyweights. The streaming arena is now brimming with contenders like Apple TV+, Amazon Prime Video, and YouTube Premium, launched by Apple, Amazon, and Google, respectively.

This fierce rivalry compels NFLX to perpetually innovate and enrich its content library to retain its crown as the streaming kingpin. Furthermore, the mounting expenses of content licensing and the delicate balance between original productions and licensed content present enduring hurdles for NFLX to overcome.

Bottom Line

As evidenced by their latest quarterly results, both NVDA and NFLX continue to deliver impressive performances, standing as formidable players in their respective industries, with their growth trajectories reflecting their strategic prowess and market dominance.

NVDA's cutting-edge GPU chips have propelled it to the forefront of the AI revolution, with staggering earnings growth and market capitalization making it a top contender in the tech landscape.

Fueled by these promising prospects, NVDA’s shares soared to unprecedented heights last month, with its market cap skyrocketing by a Jaw-dropping $267 billion in a single day. This remarkable surge nearly matched the entire market cap of NFLX, reflecting immense investor confidence in NVDA’s prospects.

NFLX, on the other hand, dominates the streaming entertainment space with its vast content library and global subscriber base. Despite facing stiff competition from tech giants and emerging streaming platforms, NFLX remains focused on expansion and innovation, which is evident in its ambitious growth strategies and robust financial health in the last reported quarter.

While challenges and competition persist, NVDA and NFLX demonstrate resilience, adaptability, and a relentless drive for success, making them compelling options for investors seeking growth opportunities in the dynamic worlds of technology and entertainment.

However, NVDA’s shares are trading at a much higher valuation than NFLX. For instance, in terms of forward Price/Sales, NVDA is trading at 19.37x, 178.7% higher than NFLX’s 6.95x. Likewise, NVDA’s forward Price/Book ratio of 24.32 is 116.2% higher than NFLX’s 11.25x.

The higher valuation of NVDA compared to NFLX indicates investor confidence in NVDA's future growth potential, leading investors to be willing to pay a premium price for its shares. However, it also signals that NVDA's anticipated growth might already be factored into its stock price, potentially dimming its attractiveness compared to NFLX.

Furthermore, while NVDA’s ascent captivates the stock market and propels the S&P 500 Index to unprecedented highs, Barclays research analyst Sandeep Gupta anticipates that demand for AI chips will stabilize once the initial training phase concludes.

Gupta underscores that during the inference stage, the computational demand is lower compared to training, suggesting that high-powered PCs and smartphones could suffice for local inference tasks. Consequently, this scenario may reduce the urgency for NVDA’s expanding GPU facilities.

As a result, investors might be banking on future growth that could potentially fail to materialize. With that being said, NFLX may emerge as a more promising growth stock compared to NVDA.

4 Streaming Stocks to Buy Instead as Netflix Faces Lawsuit

Streaming giant Netflix, Inc. (NFLX) finds itself in the center of a lawsuit over the upcoming Zack Snyder sci-fi epic Rebel Moon. NFLX has been sued for axing a gaming development contract based on filmmaker Snyder’s much-anticipated franchise, originally created as a “Star Wars” movie.

On September 28, 2023, Evil Genius Games filed a lawsuit against NFLX at the U.S. District Court in the Central District of California. Evil Genius Games is a popular developer and publisher of tabletop role-playing games based on major motion picture franchises.

The plaintiff has claimed that it had begun working with NFLX earlier this year to develop a tabletop role-playing game (TTRPG) based on Snyder’s “Rebel Moon,” and the game’s release was supposed to have coincided with the release of the first film’s streaming release on December 22, 2023.

According to the plaintiff, when the two parties started working on the project earlier this year, NFLX had a Rebel Moon movie script, a rough idea about the Rebel Moon universe, and a few cursory graphical assets. However, the script was missing background information vital to the story.

In the court documents, Evil Genius claimed that they not only did the work they were required to do but also supplied all the missing pieces and created a well-integrated backstory for the whole franchise. The plaintiff came up with a 228-page World Bible, a 430-page Player’s Guide, and a 337-page Game Master’s Guide.

Evil Genius had paid NFLX for a license and agreed to share profits from the licensed articles with NFLX. Despite having collaborated for months, NFLX decided to pull the plug on the project on May 25, weeks after the work was finalized and turned over to the streamer.

NFLX alleged that Evil Genius had violated the confidentiality agreement for “Rebel Moon” and violated its trust by sharing artwork at an industry trade show in March 2023. However, the plaintiff maintains that they had acquired NFLX’s permission to show artwork from the game at the 2023 Game Manufacturers Associate Exposition to “create some industry buzz” for the project.

According to the court documents, Evil Genius alleged that two NFLX employees were present at the event and helped hand out materials to retailers at the show. The legal filing states that “It became clear that Netflix was simply using the alleged breach and termination to hijack (Evil Genius’) intellectual property and prevent (Evil Genius’) from releasing the game.”

Evil Genius CEO David Scott said, “Our aim is to ensure our team is recognized for their fantastic work, and that we can release this game for millions of enthusiasts to enjoy. It’s disheartening to see Netflix backpedal on content that was jointly showcased and had received their prior consent. We urge our supporters to contact Netflix and Zack Snyder to push for the release of this game.”

While the allegations on NFLX are severe, the streamer has yet to comment on the lawsuit. In this scenario, investors could look to buy streaming stocks Comcast Corporation (CMCSA), The Walt Disney Company (DIS), Roku, Inc. (ROKU), and Paramount Global (PARA) as they are likely to benefit from NFLX’s bad press.

Let’s delve into the fundamentals of these stocks.

Comcast Corporation (CMCSA)

CMCSA is a media and technology company. Its segments include the Cable Communications segment, Media, and the Studios segment, which includes film and television studio production and distribution operations. The company has three primary businesses: Comcast Cable, NBCUniversal, and Sky.

CMCSA’s revenue grew at a CAGR of 4.6% over the past three years. Its EBITDA grew at a CAGR of 4.1% over the past three years. In addition, its EBIT grew at a CAGR of 4.7% in the same time frame.

CMCSA’s revenue for the second quarter ended June 30, 2023, increased 1.7% year-over-year to $30.51 billion. Its adjusted EBITDA rose 4.2% over the prior-year quarter to $10.24 billion. The company’s adjusted net income increased 4.8% year-over-year to $4.72 billion. Also, its adjusted EPS came in at $1.13, representing an increase of 11.9% year-over-year.

For the quarter ended September 30, 2023, CMCSA’s EPS and revenue are expected to decline 1.4% and 0.4% year-over-year to $0.95 and $29.73 billion, respectively. It surpassed consensus EPS estimates in each of the trailing four quarters.

The Walt Disney Company (DIS)

DIS operates as an entertainment company worldwide. The company engages in film and episodic television content production and distribution activities. It operates through two segments, Disney Media and Entertainment Distribution; and Disney Parks, Experiences, and Products.

On September 11, 2023, DIS and Charter Communications (CHTR) announced a transformative, multiyear distribution agreement to maximize value for consumers and support the linear TV experience. Due to the deal, most DIS networks and stations will be restored to Spectrum’s video customers.

DIS’ revenue grew at a CAGR of 8% over the past three years. Its EBIT grew at a CAGR of 4.6% over the past three years. In addition, its EBITDA grew at a CAGR of 2.5% in the same time frame.

For the third quarter ended on July 1, 2023, DIS’ revenues increased 3.8% year-over-year to $22.33 billion. Its net loss attributable to DIS came in at $460 million, compared to a net income attributable of $1.41 billion in the prior-year quarter.

The company’s loss per share came in at $0.25, compared to an EPS of $0.77 in the prior-year quarter. Also, its cash provided by continuing operations increased 45.8% year-over-year to $2.80 billion. In addition, its free cash flow increased 775.4% year-over-year to $1.64 billion.

Analysts expect DIS’ EPS and revenue for the quarter ended September 30, 2023, to increase 153.2% and 6.4% year-over-year to $0.76 and $21.44 billion, respectively.

Roku, Inc. (ROKU)

ROKU operates a TV streaming platform. The company operates in two segments: Platform and Devices. Its streaming platform allows users to find and access TV shows, movies, news, sports, and others. The company also provides digital advertising and related services. In addition, it offers billing services; and brand sponsorship and promotions, as well as manufactures, sells, and licenses smart TVs under the Roku TV name.

On August 31, 2023, ROKU and TV Azteca announced a strategic partnership that will enable brands and agencies to purchase TV streaming advertising on the Roku platform in Mexico through TV Azteca.

ROKU’s International Advertising Vice President Mirjam Laux said, “The collaboration with TV Azteca increases our reach in the market and is a significant step to expand our growing ad sales business in Mexico. Working with TV Azteca, a trusted media group with deep connections to brands and advertisers, helps us to accelerate our advertising business and create more impactful marketing.”

ROKU’s revenue grew at a CAGR of 33.6% over the past three years. Its Tang Book Value grew at a CAGR of 32.3% over the past three years. In addition, its Total Assets grew at a CAGR of 31.1% in the same time frame.

ROKU’s total net revenue for the second quarter ended June 30, 2023, increased 10.8% year-over-year to $847.19 million. Its total gross profit rose 6.5% year-over-year to $378.27 million. The company’s net loss narrowed 4.2% year-over-year to $107.60 million. Also, its loss per share narrowed 7.3% year-over-year to $0.76.

Street expects ROKU’s revenue for the quarter ended September 30, 2023, is expected to increase 11.6% year-over-year to $849.38 million. Its EPS for the same quarter is expected to decline 124.5% year-over-year to $1.98. It surpassed the Street EPS estimates in each of the trailing four quarters.

Paramount Global (PARA)

PARA operates as a media and entertainment company worldwide. The company operates through TV Media, Direct-to-Consumer, and Filmed Entertainment segments.

On August 7, 2023, PARA and KKR announced signing an agreement pursuant to which KKR will acquire Simon & Schuster. PARA’s President and CEO Bob Bakish said, “We are pleased to have reached an agreement on a transaction that delivers excellent value to Paramount shareholders while also positioning Simon & Schuster for its next phase of growth with KKR.”

“The proceeds will give Paramount additional financial flexibility and greater ability to create long-term value for shareholders while also delivering our balance sheet,” he added.

PARA’s revenue grew at a CAGR of 5.7% over the past three years. Its levered FCF grew at a CAGR of 2.3% over the past three years. In addition, its Total Assets grew at a CAGR of 2.7% in the same time frame.

For the fiscal second quarter ended June 30, 2023, PARA’s revenue declined 2.1% year-over-year to $7.62 billion. Its adjusted OIBDA declined 37% over the prior-year quarter to $606 million.

The company’s adjusted net earnings from continuing operations attributable to PARA declined 81.4% year-over-year to $80 million. Its adjusted EPS from continuing operations attributable to PARA came in at $0.10, representing a decline of 84.4% year-over-year.

For the quarter ended September 30, 2023, PARA’s revenue is expected to increase 4.2% year-over-year to $7.21 billion. Its EPS for the same quarter is expected to decline 70.9% year-over-year to $0.11.

Roku (ROKU) Stock: A Year-Long Analysis and Insights

The landscape of television has dynamically evolved in recent years, marked by an accelerated launch of various streaming TV options. A vast selection of subscription-based internet TV services are now at consumers' fingertips, making streaming entertainment a commonplace fixture in American households.

As consumers devote an ever-increasing proportion of their time to streaming media, TV providers rapidly shift their advertising onto these digital platforms.

The leading streaming platform provider, Roku, Inc. (ROKU), witnessed an upsurge in engagement metrics, such as active accounts and streaming hours, over the past few years. This heightened engagement has significantly echoed in the company's financial performance.

The company has seen a remarkable surge in stock prices, which have doubled since the year's onset. This uptick has notably surpassed gains in the S&P 500 and outstripped the year-to-date returns recorded by streaming giant Netflix, Inc. (NFLX).

To fully understand the factors underpinning ROKU's stellar performance in recent months, it's essential to analyze its progress comprehensively. Understanding the factors that catalyzed this growth will provide us with a more informed perspective for predicting potential future directions for ROKU, both as a company and in terms of its stock-price performance.

Recent History

The COVID-19 pandemic significantly boosted the adoption of digital streaming services. As millions of households worldwide had to spend the majority of their time indoors, there was a surge in first-time subscriptions to streaming platforms in 2020.

In July 2021, ROKU’s shares soared to a remarkable peak near $480, predominantly driven by an escalating demand for video-on-demand platforms, a trend amplified by pandemic-enforced home isolation. However, following this zenith, ROKU has experienced a slowdown in momentum, contributing to the company's stock price diving to roughly $39 by the close of 2022.

In 2020, ROKU’s users streamed nearly 59 billion hours of content, marking a 55% surge over 2019. This success solidified ROKU’s position as the custodian of streaming content within the U.S. market.

Unlike other streaming service providers, the company witnessed an upsurge in active subscribers. For instance, in the second quarter ended June 30, 2020, active accounts reached 43 million, and streaming hours totaled 14.6 billion.

Despite this success, the company is battling to hold its place in the fiercely competitive digital streaming arena. Although sales skyrocketed early in the pandemic and the company briefly entered profitability, the ongoing hurdles of intensifying competition, a saturated market, audiences gradually emerging from lockdown, and inflation strains its once robust performance.

Current Status

At the end of the first quarter of 2023, ROKU unveiled its new in-house television line and rolled out significant updates across its operating system, enhancing features and expanding channel partnerships.

The TVs come in 11 diverse models ranging from 24-inch to 75-inch screens, spanning two different lineups and reasonably priced from $150 to $1,200. This strategy is expected to have aided TV sales, boosting top-line growth in the second quarter of 2023.

For the fiscal second quarter that ended June 30, 2023, ROKU’s total net revenue soared 10.8% year-over-year to $847.19 million with platform revenue, which is mostly ad sales, gaining 11.1% from the year-ago quarter and reached $743.84 million. Device earnings, hitherto hampered by supply chain and inflation issues, rebounded with an 8.6% year-over-year gain to $103.35 million.

In addition, there has been an uptick in ROKU’s engagement metrics as active accounts and streaming hours reached 73.5 million and 25.1 billion, indicating 16.5% and 21.3% year-over-year increases, respectively. This was driven primarily by the domestic and international success of the ROKU TV licensing program, coinciding with a predicted 40% drop by the end of 2023 in U.S. households availing cable TV packages from what was a decade earlier.

The popularity of ROKU's proprietary Operating System (OS) further bodes well for the company, claiming the crown as the best-selling TV OS in the U.S. for the quarter, outperforming some major competing systems combined.

It is also worth mentioning that as of June 2023, ROKU boasts an impressive cash and cash equivalents of $1.76 billion, without any debt.

However, there remain areas of concern for the streaming service provider. Average revenue per user (ARPU) declined 7.2% from the prior year quarter. It was steady with the first quarter of 2023, which also declined year-over-year. Advertisers reducing their budgeting amid an inflationary economic environment dealt a harsh blow to the company's operations.

For the second quarter of 2023, ROKU’s loss from operations stood at $125.96 million, a distressing 14% increase from the year-ago quarter. Its net loss stood at $107.60 million, while the net loss per share reached $0.76. However, it was much better than the past three quarters.

In ROKU's second-quarter results, brand advertising remained pressured as total U.S. advertising came in flat year over year. Spending on traditional TV fell 9.4% year-over-year, while traditional TV ad scatter sank 17.2% year-over-year.

Considering the promising top-line projections unveiled by the company, ROKU’s share prices rose 31.4% to $89.61 as of July 28, 2023, the highest daily percentile expansion since November 2017, which has more than doubled this year. This expansion resulted in an approximate $3 billion upswell in the company's market cap.

Recently, ROKU announced a layoff of 10% of its workforce, about 360 people, to cut costs. This action marks the third round of staff reductions within the past year, following its decision to slash 6% of its workforce (roughly 200 employees) in March and another 200 last November.

To trim expenses further, ROKU is planning several organizational changes. It might slow the hiring rate, consolidate office space, reduce its outside services, and conduct “a strategic review of its content portfolio” to save money. Following the announcement of these cost-cutting measures, ROKU's shares spiked almost 10%.

Despite these financial strategies, the stock is trading at a premium to its industry peers. ROKU’s forward EV/Sales multiple of 2.96 is 58.1% higher than the industry average of 1.88. Also, its forward Price/Sales and Price/Book multiples of 3.29 and 4.95 are 188.1% and 161.9% higher than the industry averages of 1.14 and 1.89, respectively.

Within a year, ROKU's overall price performance presented a decelerating trend until the end of 2022, then transitioned to a stable growth phase at the beginning of 2023. This followed a significant mid-year acceleration, followed again by slight deceleration. A comparison of the current share price with that of a year ago indicates long-term growth.

Yet the stock remains significantly below its zenith recorded two years prior, echoing broader pressure on the streaming category in general to establish profitable business models.

Furthermore, changes have been observed concerning institutions' holdings of ROKU shares. Even though approximately 80.8% of ROKU shares are presently held by institutions, of the 599 institutional holders, 264 have decreased their positions in the stock. Moreover, 81 institutions have sold their positions (1,306,808 shares), reflecting declining confidence in the company’s trajectory.

Future Prospects

ROKU has raised its third-quarter net revenue forecast between $835 million and $875 million, putting aside charges related to severance and removing certain content from its streaming platform. This exceeds the earlier third-quarter estimate of approximately $815 million in revenue.

The entertainment giant also anticipates its adjusted EBITDA to conclude between a loss of $40 million to $20 million, which shows improvement from an earlier prediction of a negative $50 million. The Hollywood double strike is anticipated to influence media and entertainment spending adversely for the rest of the year. This scenario poses a relatively severe challenge, given ROKU’s extensive promotions provided for content.

ROKU has noted some recovery hints within specific advertising sectors, including CPG and health and wellness. Yet, the spending on M&E, already facing challenges across the industry, will likely face additional pressure due to limited fall release schedules. Despite these odds, the company remains determined to deliver positive adjusted EBITDA for 2024 with continued improvements.

For the fiscal third quarter ending September 2023, Street expects ROKU’s revenue to increase 11.3% year-over-year to $847.54 million, while its EPS is expected to decline 105.1% to negative $1.81.

Moreover, for the current fiscal year (ending December 2023), the company’s revenue is expected to increase 7.9% year-over-year to $3.37 billion. However, its EPS is expected to come at negative $5.04, indicating a decline of 39.4% year-over-year.

Bottom Line

Streaming service provider ROKU is poised to capitalize on the escalating digital streaming and cord-cutting trend in the upcoming years. This positions the temporary slump it experienced in 2022 as a trifle hiccup rather than an enduring setback.

However, affirming that the company has fully rebounded and is back on its consistent growth path may be premature. Further confirmation of continuous revenue augmentation, ideally substantiated by several successive quarters of enhanced performance, is still needed.

Risk-averse investors would want to keenly observe ROKU for more tangible indications of renewed profitability over the ensuing quarters. There is a potential for the company to continue generating substantial returns, provided it can add persistent value to its platform for users, content producers, and advertisers.

The persistent issue pestering ROKU is its inability to yield regular profits. Furthermore, the company's ad-supported sales infrastructure is stretching back into profitable territory. Yet its recently instituted cost-reduction measures should alleviate some of these financial burdens from 2023 onward.

Seeing ROKU deliver on its projected outcomes would be encouraging. Considering this, all attention will be on the company's performance over the subsequent quarters.

Can Tesla (TSLA) and Netflix (NFLX) Surpass Earnings Expectations?

Tesla, Inc. (TSLA) , the undisputed leader in EVs, is scheduled to release its fiscal 2023 second-quarter results on July 19 after the closing bell. Analysts expect TSLA’s revenue to increase 45.7% year-over-year to $24.67 billion for the quarter that ended June 2023.

The consensus earnings per share (EPS) estimate of $0.82 for the about-to-be-reported quarter indicates an increase of 8.2% year-over-year. For the fiscal year ending December 2023, the EV maker’s revenue and EPS are expected to increase 24% and decrease 13.2% year-over-year to $100.98 billion and $3.53, respectively.

Streaming giant Netflix, Inc. (NFLX) is also set to report its second-quarter earnings after the market close on July 19, kicking off media earnings season. The company is expected to put light on its subscriber momentum, the progress of its cheaper advertising tier, and the impact of its password-sharing crackdown.

Analysts expect NFLX’s revenue for the fiscal second quarter (ended June 30, 2023) to increase 3.9% year-over-year to $8.26 billion. However, the consensus EPS estimate of $2.86 for the same quarter indicates a decline of 10.8% year-over-year.

In addition, the company’s revenue and EPS for fiscal year 2023 are expected to grow 7.7% and 13.5% year-over-year to $34.06 billion and $11.29, respectively.

Let’s analyze each stock and determine the chances of them surpassing analysts’ expectations:

TSLA designs, develops, manufactures, and sells electric vehicles (EVs) and energy generation and storage systems in the United States, China, and internationally. The company operates through two segments: Automotive; and Energy Generation and Storage.

TSLA recently released its second-quarter production and delivery numbers, easily beating estimates as the effects of the company’s price cuts, coupled with federal EV tax credits, boosted sales.

In April, the EV maker slashed prices of some of its Model Y and Model 3 EVs in the United States, the sixth time of lowering U.S. prices this year. TSLA’s Model Y “long range” and “performance” vehicles prices were cut by $3,000 each, and that of its Model 3 “rear-wheel drive” by $2,000 to $39,990.

Further, the Elon Musk-led company lowered prices in Europe, Israel, and Singapore along with Japan, Australia, and South Korea, expanding a discount drive it commenced in China in January to drive demand.

During the second quarter, TSLA produced approximately 480,000 vehicles and delivered nearly 466,000 vehicles. The delivery figures easily beat Wall Street consensus estimates of 448,599 units and the previous quarter’s total of 422,875. Both production and delivery figures for the second quarter were all-time records for the company.

Yet, TSLA, earlier in April, reported a 4% sequential increase in deliveries in the first quarter and a 17.8% sequential rise during the fourth quarter.

Furthermore, TSLA is rapidly expanding its Supercharger network with industry competitors. On July 7, German luxury giant Mercedes-Benz (MBG.DE) became the latest to join Tesla’s Supercharger network.
Beginning in 2024, Mercedes-Benz electric vehicle owners would get access to 12,000 Tesla Superchargers across North America via the use of an adapter.

In 2025, new Mercedes EVs in North America would have TSLA’s North American Charging Standard (NACS) port built into the cars for access to the Supercharger network. This deal with Mercedes is similar to TSLA’s other charging partnerships with other automakers, Ford Motor Company (F), General Motors Company (GM), Rivian Automotive, Inc. (RIVN), and Volvo ADR (VLVLY).

On May 26, TSLA and F announced a surprise deal on electric vehicle charging technology and infrastructure. Under the agreement, Ford owners will get access to more than 12,000 Tesla Superchargers across the U.S. and Canada starting early next year.

In addition, GM followed crosstown rival F in partnering with TSLA to use its North American charging network and technologies. Under this deal, GM owners will get access to Tesla’s 12,000 fast chargers using an adapter and its EV charging app beginning the following year.

Signing on additional partners to TSLA’s charging network is expected to be a boon for the EV maker’s top line. According to Piper Sandler analyst Alexander Potter, charging deals from partners could add upward of $3 billion in revenue by 2030 and up to $5.40 billion by 2032.

The company’s first-quarter revenue of $23.33 billion was slightly below Wall Street estimates of $23.35 billion. It reported a gross margin of 19.3%, compared to 29.1% in the same period in 2022, as the cost of several price cuts hit its profitability.

Furthermore, TSLA’s net income was $2.51 billion for the first quarter, a decline of 24% year-over-year, and its EPS decreased 23% year-over-year to $0.73. TSLA’s CEO, Elon Musk, also indicated that the company would prefer higher volumes to higher margins.

Analysts continue to ring warning bells on the company’s profit margins. Gary Black, co-founder and managing partner of Future Fund expects TSLA’s adjusted EPS for the second quarter to be around $0.87, higher than the prior quarter’s $0.85 and the year-ago quarter’s $0.76. The consensus estimate stands at $0.82 per share.

However, Gary Black predicts the company’s gross margin to contract as it had offered discounts on its vehicles to boost sales.

Another stock that gears for second-quarter earnings this week is NFLX. The company offers entertainment services. It provides TV series, feature films, documentaries, and mobile games across various genres and languages.

In May, after ignoring password sharing for many years, the streaming company expanded its crackdown on password sharing across the United States and more than 100 other countries, alerting users that their accounts cannot be shared for free outside their households. It also stated that an additional fee of $7.99 per month would be charged for shared passwords in the United States.

Since the company told its users they could no longer share accounts across multiple households, daily U.S. sign-ups for the streaming service climbed by the most in at least four and a half years.According to data from the analytics platform Antenna, between May 25-28, Netflix witnessed the four single-largest days for signing up of U.S. customers since the firm began tracking this data in 2019.

During that time, NFLX saw nearly 100,000 daily sign-ups on two of the days, based on the report from Antenna.

Furthermore, the streaming giant’s ad-supported tier began to show signs of life six months following its debut. NFLX revealed that its ad-supported tier garnered five million active users globally, with sign-ups having more than doubled since early this year. The company stated that more than a quarter of new signups opt for the ad-supported plan in countries where it is offered.

During the first quarter of 2023 that ended March 31, NFLX reported mixed first-quarter results, missing Wall Street subscriber estimates while surpassing analysts’ EPS estimates. The company reported an EPS of $2.88 compared to the consensus estimate of $2.86. While its revenues increased 3.7% year-over-year to $8.16 billion, it missed the consensus estimate of $8.18.

For the first quarter, NFLX added 1.75 million streaming subscribers, which fell short of the analyst estimate of 2.06 million additions. However, its average paid memberships increased 4% year over year, while the paid net adds were 1.75 million for the quarter compared to a negative 0.2 million in the prior-year quarter. Also, its non-GAAP free cash flow rose 164% from the year-ago value to $2.12 billion.

In recent days and weeks, several analysts have raised their price targets on NFLX’s stock. One central theme across Wallstreet is an expectation of optimistic updates on the progress of the company’s password-sharing crackdown and advertising tier rollout.

TD Cowen analyst John Blackledge said, “Netflix’s paid sharing coupled with the ad tier rollout should drive long-term revenue upside, and the launch of paid sharing in the second quarter of 2023 along with the ramping ad tier should help drive membership and revenue growth in the second half of 2023.”

The TD Cowen analyst forecasts net subscriber growth of 2.37 million during the second quarter, compared with a consensus estimate of around 1.70 million, and “revenue re-acceleration” in the second half of 2023. John Blackledge reiterated his “outperform” rating and $500 stock price target.

Also, UBS analyst John Hodulik increased his stock price target from $390 to $525 while maintaining his Buy rating.

Hodulik stated, “We continue to believe paid sharing will drive 5 percent-plus uplift to revenue and see the roll-out as key to driving scale in advertising with the growth in the ad-tier mix and better targeting. Netflix eliminated its basic ad-free tier in Canada (and de-emphasized in the U.S.), which we estimate could provide a 10 percent uplift to average revenue per user over time and should help scale the ad base faster than prior expectations.”

The UBS analyst raised his estimates and predicted second-quarter financials would surpass management’s guidance, adding that he and his team “still expect accelerating second-half growth.” Hodulik expects 3.60 million net subscriber gains in the about-to-be-reported quarter and 6.50 million in the third quarter.

Bottom Line

EV giant TSLA’s better-than-expected delivery and production figures for the second quarter will likely boost the company’s second-quarter earnings. However, concerns still revolve around the impact on margins due to discounts Tesla offered on its new vehicles across different regions. But vehicle prices stabilized in the second quarter after substantial reductions announced earlier in the year.

While streaming company NFLX took a hit after reporting its first subscriber loss in a decade last year and mixed financials in the first quarter of 2023, there are higher chances of beating analysts’ estimates for the second quarter, with rising expectations of positive updates on the company’s progress on the password-sharing crackdown and advertising tier rollout.