Shares of Roku (NASDAQ:ROKU) have been volatile over the last six months, there’s no doubt about that. But for those that can stomach some of these extreme moves, Roku stock is one they should consider owning. Not only has Roku been on fire over the past few months, but its long-term story is in excellent shape. A blowout earnings report on Thursday only emphasizes that point …
Before we talk numbers, keep in mind the company’s third quarter, which was reported in November. Back in Q3, Roku beat on earnings and revenue estimates, and Roku raised its outlook going forward.
Shares plunged despite the incredible results. This is when I realized Wall Street was in a period of irrational decision making, throwing out good companies with the bad and selling regardless of the story.
Fast forward a few months and Roku delivers … again. Despite heightened expectations, earnings of 5 cents per share beat estimates by two cents. Revenue of $275.7 million grew 46.4% year-over-year (YoY) and beat expectations by $13.6 million or roughly 5%. Guidance came in strong too, with the company saying it expects to hit the $1 billion mark in revenue for fiscal 2019. This topped the average revenue estimate of ~$985 million and matched the highest analyst estimate on the Street.
Breaking Down Roku Earnings
The headline numbers were good, but below the surface was great. Active accounts rose 40% to 27.1 million, while streaming hours surged almost 70% to 7.3 billion in the quarter. Average revenue per user jumped 30% to $17.95 over the trailing 12-month period.
These numbers may just seem like jargon — hype words to talk up a volatile stock. They’re not.
Instead, it’s helping to fuel something that too many investors continue to ignore. Roku isn’t a hardware company with a commoditized product. When I used to think of Roku, I pictured the little streaming stick in the back of my TV competing with Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and others. Good luck, right?
The following numbers are very important because they explain why this isn’t the case. (Bold emphasis added by me):
Platform revenue of $151.4 million, up 77%; Player revenue of $124.3 million, up 21%.
Platform gross profit of $109.4 million, up 72%; Player gross profit of $2.9 million, down 70%.
It shows that Platform revenue — which is a combination of subscription revenue and ad revenue — is surging, while Player revenue is increasing modestly. The Platform segment isn’t feeling the margin pressure that the Player segment is feeling, but that’s also intentional to a degree. You see, Roku doesn’t want to depend on Player sales.
It wants to cast as big a net as possible and having affordable players allows for that to happen. Because the more people that get a Roku device, the more engagement goes up. The more active users and streaming hours — remember, up 40% and 69% in Q4, respectively — the company can harness, the more upside there is to Platform revenue and gross profit.
That’s the long story, the short story is this: Cord-cutting and streaming are here and no company is going to stop it. Roku is positioned squarely in that secular trend and it’s a mistake to ignore it.
Trading Roku Stock
Click to Enlarge
Roku stock — although admittedly trading a little too hot — was at $75 per share as we entered calendar Q4.
On the chart, you can see where the stock closed before its Q3 earnings report (up near $58.50). Ironically, the 61.8% Fibonacci retracement from the 52-week range sits just below that level, near $58. It wouldn’t surprise me to see Roku stock move up to this level following its strong fourth-quarter results.
This is where it gets tricky though. Why on Oct. 1 was Roku stock worth $75, but following a beat-and-raise quarter and a beat-and-top-guidance quarter, it’s not even back to where it was trading before its third-quarter results? What’s changed, what’s different?
I don’t know when Roku will get back above $75 per share, but I do believe it will happen. The story here is too good and the secular change is too powerful to ignore. Based on current earnings, Roku stock is expensive. But based on potential, it’s still cheap.
Bottom Line on ROKU Stock
I bought one stock on Christmas Eve and that was Roku. I now want to see it stay above $48, where it has the 21- and 200-day moving averages, as well as uptrend support (purple line). $58 to $60 might cause Roku stock to stall. Should it push through, a larger rally can start to take hold. While trading is possible, this is still a great long-term play.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL, AMZN, GOOGL and ROKU.
