When streaming device maker Roku (NASDAQ:ROKU) came public in late September 2017, Wall Street offered a nice reception. Roku stock spiked 68% on the first day of trading.
But it was just the start. Keep in mind that Roku stock has gone on to rack gains of over 300%. The market cap is now at about $6 billion.
The momentum should not be much of a surprise. First of all, the company is benefiting from the secular wave of cord cutting, which is disrupting traditional media operators like CBS (NYSE:CBS), Viacom (NASDAQ:VIAB) and Disney (NYSE:DIS).
About 50 million Americans will abandon cable and satellite TV by 2021, up from 20 million. Some of the drivers include better pricing as well as access to diverse content.
But there is something else that is driving Roku stock: The company keeps executing effectively on its business model. Just look at the latest earnings report. Revenues jumped by a sizzling 57% to $156.8 million, which handily beat the consensus of $141.1 million.
The company even was able to post a profit of $526,000 or zero cents a share, up from a $15.5 million loss in the same period a year ago. Granted, there was the impact from a one-time benefit from IP licensing liabilities. But even with this, Roku still was able to pull off a nice beat on the bottom line.
Roku Stock and Innovation
The consumer hardware business can be brutal, as seen with companies like Fitbit (NYSE:FIT) and GoPro (NASDAQ:GPRO). Sector challenges include the competition from mega operators like Amazon.com (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) as well as fickle customers.
But Roku has certainly been able to adapt. One of the keys is that the company has continued to invest in new innovations. For example, the company recently launched a web offering of the Roku channel, which is monetized with advertising. Then there are the Roku TV wireless speakers. By providing higher quality sound, there should be even more customer loyalty.
Although, another factor in the success of Roku has been the company’s focus on building a platform. In Q2, the company’s active accounts shot up by 46% to 22 million and the number of streaming hours rose by 57%.
In fact, Roku’s hardware business is rapidly taking a smaller share of the overall revenue pie. The sales came to $66.5 million in Q2 compared to $90.3 million for platform revenues.
Bottom Line on Roku Stock
As streaming becomes a bigger part of the content landscape, there will be a major shift in ad dollars. And the opportunity is massive. The U.S. ad market is a whopping $70 billion per year.
Now this does not mean Roku’s fate is guaranteed. Let’s face it, there are many stories of failed tech companies. But then again, it seems that Roku’s management has learned some important lessons and has been skillful in implementing them.
True, the valuation on Roku is far from cheap. Consider that the shares trade at a hefty ten times revenues. So yes, the bar is fairly high and there will likely be volatility, especially as it gets tougher to meet expectations.
But with the upcoming holiday season, it seems like a good bet that the growth will remain strong, as Roku devices are likely to be popular gifts. And more important, there appears to be an acceleration in cord cutting.
So for investors looking at an interesting high-growth company play, Roku definitely fits the bill.
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.
