Stock Market Sell-Off Continues, More To Come? Plus Breaking Down Roku’s Results
The stock market gave back gains and managed to finish in the red, with the S&P 500 falling by 55 bps, and closing at 2,701. It puts us right on target to test the 2,690 level tomorrow if we see a continuation of the market sell-off that started after the Fed minutes.
In my opinion, it is not worth getting into the whole roller coaster ride after the Fed minutes. The minutes are old news and based on economic data before the infamous labor report on February 2. But the volatility provided in the marketplace after the results gave us with some critical insights regarding levels in the market.
The chart shows that the S&P 500 has now failed two times at 2,742, and a move lower to 2,691 seems far more likely now. My expectations are for 2,691 to offer the market a far stronger level of support than 2,713. I have been writing about this now for the last few days, and the questions become what if 2,691 doesn’t hold? 2,633 is the next area of support. a decline of another 2 percent.
But as we go through the list of the usual suspect companies, you will likely begin to get the feeling there is more downside risk here than just 2,691, and a decline to 2,633 seems to be in the works.
Microsoft shares gave in today, and for the first time are beginning to exhibit what I have been writing about. It seems like the stock could be set to decline towards $85.50 and looks probably likely.
Amazon is trying its hardest to meaningful break to new highs, but $1,500 is proving not to be an easy level for the stock to breach. I have written over the past several days I think the direction of the stock is lower, and I think that is the case. I will admit, at one point around 2 PM, I was thinking about how I was going to have to write how wrong my call on Amazon has been. But for now, I live to fight one more day.
Netflix also can’t break to new highs, and $287 has seen a wall of sellers. Again, like Amazon, it looked for a moment shares could breakout, but that faded quickly. I am long Netflix and would like nothing more but for the stock to breakout, but I also realize shares are up tremendously in 2018 and if shares should decline to say $250, it is surely not the end of the world. But then again, I own it below $100, and I’m invested for the long-term, so my thought process is different here.
Apple also can’t seem to get any forward momentum and has stalled, hitting a wall of sellers at roughly $175. Again the chart looks like the stock is tired, fatigued and likely headed lower. $168 is critical, a decline below $168, sends shares below $160.
Roku was a disaster after hours, with the stock down 20 percent and trading back to $40. Shares had a big run-up before results, but that came crashing back to earth after results. These numbers, in my opinion, were terrible all around. Sure top line and bottom line beat on the current quarter, but guidance for the first quarter fell short of expectations, and personally, if you can’t even meet revenue expectations for the one quarter out, how can I expect revenue guidance for the full-year to hold?
The player segment, the actual device, showed that sales decline y/y by 7 percent, which is just amazing. This is supposed to be a growth company, that was getting a premium valuation. The fact that y/y player sales declined in the fourth quarter is astonishing.
The fourth quarter should have been a blowout given all the hype around Netflix and all these other streaming outlets. People should have been buying these device players like crazy. But no, Roku players sales declined, and it tell you three things. 1) The business has already peaked, and that means Roku will need to become more dependent on the platform revenue. 2) pricing pressures from other streaming players, like Alphabet and Amazon are having a significant effect on Roku devices. or 3) people do not them because every TV sold these is basically smart. Meanwhile, margins on their player segment fell from 14.3 percent in the fourth quarter of 2016 to only 9.5 percent in the fourth quarter of 2017.
I don’t care if they are purposely trying to sell the lower priced players or not, it speaks of pressure they are getting from the likes of the other device makers. If they had pricing power or where not being undercut, they would not have to purposely try to push only the cheaper players.
Apple’s iPhone sales are a perfect example, I wrote about in an Investopedia article. Apple raised the price of the iPhone X substantially, despite plenty of competition from Samsung and the likes. But it had a minimal impact on the number of iPhone sold while driving higher revenue. It is because Apple has pricing power and can demand a higher price for their product, Roku can not.
If Roku player sales are peaking and those numbers are declining, then what does it say to adding more users to the platform? Undoubtedly not a positive as well for future growth. If they are not interested in maximizing hardware revenue or gross profit, then they might as well give the media product away for free. That would start adding the users to the platform, right?
To make matters even worse, the platform revenue shrank as a percentage of total revenue on a sequential basis from 46 percent of revenue to 45 percent of revenue. Platform gross margins also fell year over year and sequentially by 300 bps to 74.6 percent from 77.5 percent.
This company was valued at nearly $5 billion going into this report and was trading at almost 5.5 times 2019 sales estimates of $862 million. Roku is a hardware company trying to become some kind of hybrid advertising platform. Apple trades at 3.3 times one-year forward sales, while Alphabet trades at 5.8 times one-year forward sales. Apple is the hardware company, Alphabet is the advertising platform. Do you think Roku given these results is deserving of multiples that rival Alphabet and Apple? I sure don’t.
Maybe I’m naive and simply “do not understand.” But then again, I’m the guy that came up with the on-demand generation and has been screaming for Disney to launch its own direct to the consumer product. But what do I know?
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Michael Kramer and the clients of Mott Capital own shares of GOOGL and NFLX
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