I don’t mind admitting when I’m wrong. And I was wrong about Roku (NASDAQ:ROKU) stock.
While it remains true that Roku could easily be bought by whichever of the Cloud Czars finds itself trailing in the growing streaming market, or by such entertainment companies as Walt Disney (NYSE:DIS) or Comcast (NASDAQ:CMCSA), that merely adds to the investment case after it blew out estimates on first-quarter earnings.
Roku lost $9.7 million, 9 cents per share, during the quarter, against a loss of $6.6 million, 7 cents per share, a year ago. But inside the numbers, there was a lot to cheer.
Growth at Roku
Roku sells a streaming stick and technology it can pre-install with TVs, and operates an ad-based streaming service on top of it. This means it has both sales and platform revenues, the latter being key to growth. During the first quarter, those ad revenues nearly doubled, going from $75 million in 2018 to $134 million. Ads now represent two-thirds of revenue, meaning Roku has a sustainable revenue base.
At the end of March, Roku had 29.1 million streaming accounts, up 40% from a year ago, but more important average revenue per user was up 27% from a year ago, to $19.06. The company sees this growth continuing, with revenue for the full year now estimated at over $1 billion.
Roku has pitched itself as a TV operating system, sitting between Internet accounts and streaming customers. Unlike the Amazon.Com (NASDAQ:AMZN) Fire Stick, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Chromecast or Apple (NASDAQ:AAPL) TV, it’s completely neutral as to what else you buy.
Consumers can go to a store and pick up the Roku stick for under $50, plug it into the HDMI plug of their flat-panel TV, go through a few menus to link it to their WiFi, then cancel their cable subscription and buy just the streaming services they want to use.
This is called “cord cutting” although it really isn’t, because you still have that ISP account. But 1.28 million U.S. households cut out cable in the first quarter. Netflix (NASDAQ:NFLX) could have twice the audience of cable within five years.
Roku will be happy to sell it to you.
A Wild Ride
This doesn’t mean Roku won’t remain volatile, but volatility can work both ways.
In the wake of earnings May 8, Roku rose 28% in one day. The price is well above its September high. The market cap is now $9.4 billion, compared with $11.78 billion for Viacom (NASDAQ:VIAB), home of MTV, Nickelodeon and Comedy Central.
Roku is still affordable for CBS (NYSE:CBS), which has a market cap of $18.3 billion, or Discovery (NASDAQ:DISCA), which is worth $21.8 billion. But a move by either of these companies, or the cable giants, is liable to set off a highly lucrative bidding war.
With demand for an independent streaming solution proven, there’s almost no way Roku can lose.
The Bottom Line
Roku streaming sticks are made in China and cost just a few dollars there. Roku also re-sells TVs with its technology pre-installed, and it’s the number-one smart TV brand. Prices on this gear are bound to rise with tariffs. Trade wars also spark recession fears. This will also weigh on the stock in the near term.
But peace is bound to break out in time. Even a rumor of trade peace will bring in buyers. So, let the panic settle, then get in on the gains.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and AAPL.