In light of the steep drop of the stock of streaming powerhouse Netflix (NASDAQ:NFLX), there was certainly some worry on Wall Street about the upcoming earnings report for Roku (NASDAQ:ROKU). Would there be a deceleration of growth? Might the expectations be too high?
Well, as seen in today’s trading, there was nothing to worry about. So far, the Roku stock price is up $19 to $121. In fact, it is now at an all-time high, with the market cap at $13.5 billion.
Yet the beat should not really be a surprise. Keep in mind that the company has exceeded the consensus forecast for every quarter since coming public in September 2017.
OK, as for the second quarter, revenues came in at $250.1 million (up 59% year-over-year), which was well above the analysts’ average of $224.4 million. The bottom line also showed improvement. The loss was 8 cents a share, compared to 21 cents a share from Wall Street.
Although, the active user count was inline — at 30.5 million.
The Right Growth Strategy
What started as primarily a hardware company has transformed into a platform, which has seen strong growth from advertising revenues. It’s a strategy that has allowed the company to deal with the commoditization in the industry, driven by the intense competition from mega tech players like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN). For example, in Q2 the platform revenues spiked by 8% to $167.7 million.
It’s true there was erosion in the gross margin on a sequential basis. But this should not be a concern for ROKU stock. The drop was mainly due to important strategic moves that will help improve the business, such as the transition to video advertising and the introduction of premium subscriptions.
Besides, when it comes to ROKU stock, Wall Street is mostly focused on the top line. And the good news is that the momentum should continue for some time. In the earnings report, ROKU increased its outlook for 2019, as the company said its midpoint is now $1.085. This means that the growth rate is expected to go from 40% to 46%.
Bottom Line On Roku Stock
The ROKU shareholder letter set forth its key advantages: “The industry-wide shift to streaming is accelerating. Our business momentum and ongoing investment in areas of competitive differentiation continue to drive growth and attract users, advertisers and content publishers.”
Yes, ROKU is riding a secular wave — and the company is nicely positioned to benefit. For example, in the quarter, the number of streaming hours jumped by 72% to 9.4 billion and its offerings represented more than one in three smart TVs sold in the US.
It certainly helps that the company continues to invest heavily in innovation. Critical to this has been working closely with large customers, such as Walmart (NYSE:WMT). But ROKU has also been focused on artificial intelligence and machine learning. Note that the latest quarter was the first time machine learning became the engine behind most of the content recommendations on The Roku Channel.
Granted, the valuation on ROKU stock is far from cheap. Consider that the shares trade at about 15 times sales. Then again, there should be a premium because of its growth, market opportunity and strong brand. More important, streaming is a strategic business nowadays as seen with aggressive efforts from companies like Disney (NYSE:DIS) and AT&T (NYSE:T). In other words, the bull run is probably not over for Roku.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
