Last month, I wrote that Roku Inc (NASDAQ:ROKU) looked poised for short-term gains. During this period, ROKU stock jumped 79%.
The main reason: a rock-solid earnings report. In the quarter, revenues shot up by 40% to $124.8 million and the net loss came to 10-cents-a-share (this was the first report since the company launched its IPO in late September). The Street consensus, on the other hand, was looking for revenues of $110.5 million and a loss of $1.37-per-share.
The strong engagement with the ROKU platform is what drove revenue growth. There was a 48% spike in active accounts to 16.7 million and a 58% increase in streaming hours to a whopping 3.8 billion.
All this is certainly impressive as ROKU has some of the world’s toughest rivals. They include operators like Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).
Then again, it helps that ROKU founder and CEO, Anthony Wood, has put together a great strategy. Keep in mind that he has learned some harsh lessons over the years. For example, while he invented the DVR back in the 1990s, his company would ultimately fail because of the competition.
So when Wood created ROKU, he wanted to instead create an OS for television. Think of it as being something like Microsoft Corporation’s (NASDAQ:MSFT) Windows or Google’s Android. In other words, ROKU would be a platform allowing for many partners to stream content – making it more and more attractive to consumers.
As a result, ROKU has seen substantial growth from advertising, audience development and content distribution services, which are known as platform revenues. Interestingly enough, the hardware is sold at cheap levels in order to expand the user base. This has also led various TV manufactures to integrate the technology.
Here’s how Wood put it during the earnings call: “Our value proposition to content publishers and advertisers is clear. Roku is a large-scale platform that monetizes the hard-to-reach and valuable TV streaming audience. Many streamers started their OTT experience with ad-free services like Netflix, but ad-supported content is the fastest growing segment on the Roku platform and free is one of our most popular searched terms.”
And yes, this is paying off in spades. In the latest quarter, platform revenues jumped by 137% to $57.5 million and accounted for 46% of total revenues, up from 27% in the same period a year ago.
Bottom Line on ROKU Stock Price
While ROKU’s business is showing nice traction, I think investors may want to hold off right now on buying the shares. Much of this is actually due to IPO dynamics. First of all, there is a relatively small float of shares on the market, at roughly 16 million. This means it does not take much buying power to move the ROKU stock price. Although, by late March when the lock-up provision expires, the remaining shares will hit the market.
Another issue is that the recent surge in ROKU stock has probably been the result of a short-squeeze. This is when short sellers must buy back stock to cover their positions. This is often magnified when there is a small float.
And finally, Wall Street analysts have an average price target of $27, which is at a 20% discount to the current price. Note that many of these analysts generally have upbeat opinions anyway. So all in all, it seems reasonable that there will be a cooling off period for ROKU stock as the enthusiasm subsides.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.