ROKU Stock Is a Classic Example of Why Profits Matter

ROKU (NASDAQ:ROKU) is one of those stocks I’ve stood behind in 2018 despite the fact the company doesn’t make any money. As a result, my pride’s been battered and bruised as ROKU stock has taken a beating. It’s down 47% through November 30 after reaching an all-time high October 1 of $77.57.

Here’s what I said about Roku stock in March:

“As a rule, I’m not a fan of investing in money-losing stocks, but at least Roku has all the makings of a profitable business five years from now,” I wrote December 6, 2016.

“Sometimes rules are meant to be broken. In the case of ROKU stock, I was willing to make an exception. Since then it’s ridden higher into the $50s, only to come crashing back to the low $40s where it was in early December when I defended its stock price.”

I finished my March 2 article suggesting investor fears of ROKU stock crashing as a result of the lock-up expiry were unfounded. Roku’s story was very much intact and it was a buy with cash in reserve in case it dropped further.

It fell to a 52-week low of $29 in early April only to jump by 167% over the next six months.

What Goes Up Must Come Down?

The company’s Q3 2018 results were good, but not good enough for investors, knocking ROKU stock for a 22% loss November 8 — its worst one-day loss since its September 2017 IPO.

Interestingly, while ROKU beat on the top and bottom line, it missed analyst expectations for average revenue per user (ARPU) by a dime — analysts were expecting $17.44 — signaling a potential slowdown in its streaming advertising.

My argument for owning ROKU stock was simple.

As long as the company kept growing its active accounts and viewing hours of those active accounts, advertising revenue would continue to grow.

In Q3 2018, Roku grew its active accounts by 43% year-over-year and 8.2% on a sequential basis to 23.8 million. The company increased streaming hours 63% YoY and 12.7% sequentially to 6.2 billion. So, the average hours streamed per account in Q3 2018 was 260.5, 4.2% higher than in Q2 2018, and 14.5% higher than Q3 2017.

That’s good, no?

Again, it all goes back to the analysts. They were expecting platform revenue (advertising) of $103.2 million; Roku came in $3.1 million below the estimate. That’s hardly worth a 22% single-day decline, but when you’re not making money, anything’s possible from investors given increased market volatility.

I will say this: ARPU in the third quarter increased by 4.5% on a sequential basis to $17.34, its smallest increase in the past four quarters. That’s at least worth watching in the coming quarters.

ROKU Stocks and Future Profits

I still believe that Roku will go on to be a very profitable company, much like Netflix (NASDAQ:NFLX).

The advertising dollars Roku generates will increase exponentially once advertisers genuinely buy into streaming ads. Roku CEO Anthony Wood said this on CNBC:

“If you’re an advertiser, you’re seeing your viewers shift from traditional linear TV to streaming…. When viewers moved to mobile, the ad dollars took a few years to catch up. But they will catch up.”

In fiscal 2018, Roku expects revenues of at least $722 million, a net loss of $13-$20 million, and positive EBITDA of at least $21 million. That last number is significant because it represents a third consecutive quarter of positive EBITDA and EBITDA growth, a sign that GAAP profits are imminent.

In hindsight, it’s easy to critique my recommendation of Roku stock, pointing to the fact that it wasn’t making money as a prime reason I shouldn’t have been so gung-ho about the company or its stock. However, if Roku’s assertion that all TV will be streamed and so too will TV advertising, a prediction I tend to agree with, the future price of its stock will be much higher than $77.57.

But first Roku has to make a fiscal profit. When it does that, the sky’s the limit.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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