Roku (ROKU  ) shares dropped nearly 30% following the company's Q2 earnings miss. However, shares have recovered the bulk of these losses in the ensuing sessions. There is similar price action in many growth stocks following weak earnings results. Bulls would interpret this price action as capitulation and that 'bad news' is priced in, while bears see this as evidence of short covering and nothing more than a relief rally, while the longer-term trend remains down.

Roku missed analysts' estimates on the top and bottom line by a wide margin as its growth continues to decelerate. The company's forecast also fell short of expectations and continues to signal a company whose growth trajectory may have peaked. Further, its increasing reliance on advertising for growth is also proving to be difficult in an environment where companies are pulling back on ad spending.

Inside the Numbers

In Q2, Roku reported a loss of $0.82 per share which exceeded analysts' estimates of a $0.69 per share loss. Revenue also missed at $764 million vs $805 million. The company's forecast for the next quarter also fell short with it seeing $700 million in revenue, while analysts were looking for $902 million. It also pulled its full-year forecast due to increased uncertainty.

It blamed its underwhelming performance on weakness in ad spending, recessionary fears, inflation, and supply chain issues. It said that slowing consumer spending on tech hurt sales of Roku devices and TVs. Like other tech companies, Roku is cutting costs and slowing hiring. It compared to the current period to the pandemic which also saw a sharp pullback in ad spending.

Weakness in advertising is not surprising given similar results from Meta (META  ), Snap (SNAP  ), and Twitter (TWTR  ).

For Roku, the next stage of its growth is through digital advertising in the connected TV market which makes it more sensitive to the economic environment. Over the last few years, Roku has been a premier growth stock due to people disconnecting cable in favor of streaming TV with Roku one of the leading companies. This trend has slowed due to saturation and the slowdown in tech spending.