Bears Should Be Terrified of Roku Inc’s Impending Growth Momentum

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ROKU - Bears Should Be Terrified of Roku Inc’s Impending Growth Momentum

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Roku Inc. (NASDAQ:ROKU) will likely end the year as one of the best IPOs of 2017. After touching as low as $15.75, ROKU stock rocketed higher at the end of November — and for good reasons. As the stock reaches new highs, technology investors will need to decide if they should chase the stock now or wait.

Multiple Positive Catalysts

The company’s first publicly posted earnings report on Nov. 8 attracted heavy buying in its shares. Roku reported revenue of $124.8 million, up 40% from last year. Its gross profit growth was even more impressive, up 92% to nearly $50 million. Every key metric went up, including active accounts, which grew ~ 50% to 16.7 million. The user base spent nearly 60 percent more time streaming content.

Roku’s revenue from hardware (player) may only have grown 3.8% from last year, but revenue from its Platform unit jumped 137.1% to $57.5 million.

Stronger Forecast

Analysts expected Roku to lose money in the fourth quarter on revenue of around $177 million. Instead, Roku forecast net revenue of between $175 million – $190 million. Its EBITDA will be between a loss of $6 million to break-even. Roku credits its strong momentum in the quarter ahead to TV manufacturers including Roku with the TVs they sell. TCL, one of Roku’s TV partners, reached the #2 spot in September for TV sales in the U.S. In its letter to shareholders, Roku said it would focus on consumers by creating the best experience possible:

“We intend to maintain our focus on offering consumers the best TV experience in the industry, providing our content publishers access to the most engaged audience of streamers, and offering advertisers even more creative and rewarding ways to reach our OTT [over-the-top] audience.”

Roku’s success is easily explained: it created the best smart TV operating system. No other hardware company matches Roku’s user experience. Neither Samsung nor Sony Corporation (NYSE:SNE) has a better operating system on the televisions, despite both companies reaching the top percentile in sales. But Sony is embracing Roku by supporting a Roku app on its TVs. As consumers resonate more with Roku’s brand, they will more likely install the app, despite not buying a unit running on the Roku OS.

Short Attack Fails

With a short float of 42.5%, a drop in ROKU stock would give bears a big profit. Yet the latest short attack failed. Citron tweeted:

“Time to pop some real bubbles. $ROKU, total joke. Citron trusts Mark Mahaney at $28 price target and that is IF they can hold comp back. Today’s Needham research is irresponsible. Unless $ROKU finds a way to stream a BTC- this stock is MUCH LOWER….caveat emptor”

Unfortunately for Citron, the firm’s attacks on expensive stocks don’t always pay off. The company called Himax Technologies, Inc. (NASDAQ:HIMX) a fraud. Since then, the stock has fallen nearly 30 percent from its peak in November.  Conversely, Citron was bearish on Shopify Inc. (NYSE:SHOP). Though the stock fell to the low $90’s, it has since recovered, closing at above $105 recently. Its bearish call on Nvidia Corporation (NASDAQ:NVDA) did not play out, either. The graphics maker and artificial intelligence (AI) hardware developer returned billions back to investors through a share buyback and dividend raise.

Bottom Line on ROKU Stock

Roku’s site lists many TV manufacturers that have its service built in. These include Insignia, Hisense, Sharp, Hitachi and, as mentioned already, TCL.

For now, shorts are wrong in betting against the OTT TV-viewing market. As content providers consolidate, Roku will enjoy rapid growth, as consumers buy hardware to consume online streaming on their televisions.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities. However, he does cover Himax Technologies in his DIY Value Investing newsletter.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/bears-terrified-roku-growth/.

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