Yahoo Finance

Tom Forte, senior research analyst at DA Davidson, joins Yahoo Finance Live to discuss Roku's earnings and stock outlook.

Video transcript

DAVE BRIGGS: Profit signal . Now we're seeing Roku shares drop sharply in afternoon trading, down 18 percent. This stock is down 75% year over year. With us is Tom Forte, Managing Director, Senior Research Analyst, DA Davidson. Nice to see you, Tom. What has moved these stocks so far? What did we learn?

Tom Forte: Yeah, I think what we're seeing is a weakness in digital advertising expanding into connected TV. So it kind of started with Snapchat, then it moved to meta platforms, then it moved to YouTube, and now we're clearly seeing the Roku signal. I think this is what will hurt the stock after hours.

Rachel Akuffo : What about the rock competition in this country? Of course there's Google, there's Microsoft, other companies are really competing for these streaming devices and services.

Tom Forte: Well, that's a very good question. so I think. So Roku has always had very strong competition. If you think about it, you've always swum with sharks. The good news for Roku and everyone else you mentioned earlier is that you're watching those TV commercials that stream online. You see Netflix offers an ad-supported service for $6.99.

So the actual problem isn't that money isn't moving fast enough online. What you're seeing with Roku is that distribution markets are drying up. So the short-term ad market is a challenge for Roku.

Sena Smith : Tom, to go back to that... to go back to what you said, I think it's a big challenge in terms of the advertising market here. According to Roku's letter to shareholders, we believe these conditions are temporary. But it is difficult to predict when they will stabilize or recover. Do you have any ideas or predictions on how to improve this image for Roku?

Tom Forte: So two things. First, I once thought it might be a political ad stop for Hulu, Roku or something. But of course that is not the case. Number two, I think you're referring to the early days of the pandemic. Digital advertising April 2020 was negative. And then when we saw that the economy was doing better than we thought, digital advertising came back in a big way.

I think now that we have a level playing field, when we start to think the economy is moving in the right direction, I think the digital ad dollars will come back. And then things get better for Rock. Hopefully sometime on the 23rd.

Dave Briggs: So the win and what an inspiration, Tom. I know they sell modern home products now. And Walmart has an app with iCloud video recording. How important is this or what else can it create?

Tom Forte: It's very important. If you're thinking about the hardware benefit, the only problem with Roku is that I have a TCL Roku TV, a Roku soundbar, and stuff like that. Generally, equipment is sold when it is delayed. And they make most of their money from advertising or operating systems for smart TVs.

That's why I'm excited to see the brand evolve into a smart home. But this will not be a big difference in terms of profitability. To make a profit, advertising must actually exist.

Senna Smith: Tom, what's the monetization story here for Roku ?

Tom Forte: The story of making money is that you have this great opportunity. OTT audiences now exceed broadcast TV. Cable TV is ahead. But ad spending is still concentrated on linear TV. It's… moving forward with the times, it's a big opportunity for Roku and the others. I guess despite the short-term headwinds, that's why I'm still yelling at him.

Sena Smith: And Tom, Steve Ludden , Roku's CFO is leaving the company. He has been CFO of Roku since 2015. No Roku involved in Loud, worried?

Tom Forte : Steve was a great CFO, but if you look at the hiring in the quarter, they're getting a lot of high-paying, high-profile moves at Roku to lead programming efforts and manage proprietary content. . So I will miss working with Steve. I think he's a very good choice for the next CFO, but the good news is that they're still very interesting, sorry, great leaders, even though, as you say, the stock is down 75% for the year. To date

Senna Smith : And then there's 17% more in the extended marketing here. Well, Tom Forte, it's always good to see you. Thanks for the reply...

Tom Forte : Thank you.

Senna Smith: Leave that profit with us .