Netflix Inc. and Walt Disney Co. are making new bets on advertising-supported media, but that may not end up helping streaming platform Roku Inc.
As Netflix
NFLX,
and Disney
DIS,
prepare for expected 2023 launches of ad tiers on their flagship streaming services, Wolfe Research’s Peter Supino worries that prices for advertising impressions could come down.
Read: Netflix co-CEO Sarandos says streaming service is bringing ads to platform
That’s one reason why he downgraded Roku’s stock
ROKU,
to underperform from peer perform late Monday. Netflix’s and Disney’s planned ad initiatives, “rather than expanding the pie,” could end up lowering the cost per mille (CPM), or the price advertisers pay for impressions, due to heightened supply volumes, Supino wrote. The new entrants could also “push dollars away from non-premium categories.”
Roku sells streaming hardware and licenses its operating system to television manufacturers, but the company also makes money from advertising, including when viewers watch programs through its ad-supported Roku Channel that aggregates various content.
“The COVID lockdown saw consumers (and advertisers) rush to streaming,” Supino wrote more generally. “However after the rush in ’20 / ’21, CTV [connected TV] advertising spend growth should organically slow,” leading to possible risk on average revenue per user (ARPU).
He’s also concerned about Roku’s user-growth trajectory, writing of an “elusive” recovery in net additions.
“Amidst falling conversion of hardware sales to new accounts, ongoing supply chain constraints and inflationary pressure on consumer spend,” Supino cut his forecast for 2022 net additions to 6.7 million, which he said would be the lowest level seen since 2017.
Supino set a $77 price target on Roku’s stock while warning of “mounting challenges” to net additions and ARPU in a note titled: “As Streaming Matures, Seeing More Cracks in This Old House.” (Roku acquired the rights and more to “This Old House,” a home-improvement program, last spring.)
Shares of Roku are off 3.5% in premarket trading Tuesday. They’ve lost 62% so far this year as the S&P 500
SPX,
has fallen 17%.
The company is due to post second-quarter earnings after Thursday’s closing bell.