Considering the momentum in cord-cutting, I wish I hadn’t underestimated Roku Inc (NASDAQ:ROKU). With the ROKU stock price now up 50%-plus Thursday morning, I really wish I hadn’t.
We talk all the time about the momentum in Netflix, Inc. (NASDAQ:NFLX). How AT&T Inc. (NYSE:T) is seeing sub losses on DirecTV and what Walt Disney Co (NYSE:DIS) can do to be a dominant player in the future. As of the last week, that meant buying most of Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA).
Roku has been a part of that content consumption revolution and made a splash when it went public in late September. Roku’s initial public offering price was set at $14 per share, but nearly hit $30 by its second day. So you can see why investors may be hesitant of the name, given the big rally.
But its results are paving the way to more gains.
Roku Earnings
The magnitude of the beats is what impressed me most. Sales grew 40.1% year-over-year as results of $124.8 million came in 13%, or $14.3 million, ahead of analysts’ estimates. Gross margins jumped from 29% to 40% YoY in the quarter, as higher-margin products start to make up a larger part of overall revenue.
Earnings resulted in a 10 cent per share loss. But this is important: Analysts were looking for a loss of 29 cents per share. Roku’s results were 65% better than what analysts were forecasting.
Does that mean all of their estimates are off? Because to me, that’s where Roku would become really attractive, even if it means chasing the stock up 20% to 30% from Wednesday’s close. Let’s explain why.
Analysts were looking for 21.8% sales growth in 2017 vs. 2016, and 28.6% growth next year. Despite this top-line growth, they were expecting the bottom line to result in a 64 cent per share loss this year and a 50 cent per share loss in 2018.
These were the third quarter results, so 2017 is quickly wrapping up. 2018 becomes the real focus and whether the analysts are close to the mark or not. If the fourth-quarter is any estimate, they are not. Management expects revenue of $175 million to $190 million, while consensus estimates call for $177 million in sales. An EBITDA range of -$6 million to breakeven is better than the $7.4 million EBITDA loss analysts are looking for.
Roku could be setting itself up for a solid 2018 depending on how far behind analysts estimates are.
See Snap Inc (NYSE:SNAP), that’s how you enter the public markets.
Trading Roku Stock
The headline numbers were solid, but the underlying themes were very good as well. Active accounts climbed 48%, streaming hours — very important — grew 58% and average revenue per user jumped 37%.
I’m on the bandwagon: Roku is doing great. The only question now is, when and where do we buy?
Given the momentum in the business and the rejuvenated momentum in the stock, there is a clear bull case to Roku. However, ROKU stock price is flirting with 50% one-day gains and trading above $27 Thursday morning. That’s a big price to pay overnight.
There are two ways to trade Roku stock from here though. Just above $25 proved too rich for ROKU stock in its early trading days. Given such a big move, perhaps $27-and-change will prove too much again. If that’s the case, look for Roku stock price to consolidate a bit between $22 and $25. If it does, it could be gearing up for a larger move over the next few weeks.
What if Roku doesn’t pullback? That’s almost the easier trade in this situation. We now have a line in the sand: $25 to $25.50. If this level fails to act as support, ROKU stock price will fall into the range just below. If it does act as support, that’s the level longs can trade against.
The bottom line: Roku put out fantastic results. The stock is reacting to a very strong quarter, both in the headline and underlying business. We want to go long Roku into year-end and are targeting its IPO highs of $29.10.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
