Roku (NASDAQ:ROKU) ended 2018 at $30.64. But, year-to-date, the stock is up 340% to its current price of $133. It’s safe to say Roku shareholders consider it a logical candidate for the stock of the year.
I sure do — and here are a few reasons why.
Roku’s Platform Use Still Growing
In December 2018, despite Roku’s difficulty pulling together four consecutive quarters of profitability, I stood behind the video streaming platform. I felt it would go on to become a very profitable company in much the same way Netflix (NASDAQ:NFLX) did several years ago.
The one negative, I argued, was that the company’s average revenue per user (ARPU) in the third quarter of 2018 grew by 4.5% on a sequential basis to $17.34, its smallest increase since Q3 2017.
Between Q4 2018 and Q3 2019, it had sequential ARPU growth of 3.5% ($17.95), 6.2% ($19.06), 10.5% ($21.06) and 7.2% ($22.58). That’s average sequential growth of 6.9% over the past four quarters, much higher than the 4.5% growth in Q3 2018.
Over the past four quarters, Roku’s active accounts and viewing hours have grown by 36% and 68%, respectively.
“As long as the company kept growing its active accounts and viewing hours of those active accounts, advertising revenue would continue to grow,” I wrote Dec. 3, 2018.
“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.”
Fast forward to Q3 2019, and the average hours streamed per account was 318.9, 22.4% higher than in the same quarter a year ago.
As long as the average hours streamed per account keeps moving higher, so too will the advertising revenues Roku generates.
It’s Still Losing Money
On a GAAP basis, Roku expects to lose between $61-$66 million in fiscal 2019. On a non-GAAP basis, it expects adjusted EBITDA to be between $28-33 million on revenue of at least $1.1 billion.
From a gross margin perspective, it expects gross profits of $489-494 million and a gross margin of at least 44.5%, 58% higher than its gross margin of 28.1% in fiscal 2015. In that same period, Roku increased its R&D spending from $50.5 million in 2015 to $186.2 million through the first nine months of 2019.
Roku today spends almost 26 cents per dollar of revenue on R&D compared to 16 cents in 2015. However, it’s losing about the same amount of money — a sign the expense it’s putting into developing new products and services isn’t doing a whole lot of damage to its bottom-line losses.
I like to talk a lot about a company’s pathway to profitability. The figures above suggest the Roku CEO and founder Anthony Wood knows what he’s doing.
ROKU Stock Ought to Be Crowned Stock of the Year
Needham analyst Laura Martin raised Roku’s target price at the beginning of December by 33% to $200, urging its clients to buy on any dips it might have over any valuation concerns.
“In 2020, Roku’s key upside valuation driver will be accelerating subscription SVOD revenues, which lowers investment risk,” Martin wrote in her December note to clients. “[YouTube is] the winning aggregator of user-generated videos. Roku will be the winning aggregator of TV and films.”
Whether you’re looking back at 2019 or ahead to 2020, Roku remains a stock of the year candidate and a smart long-term hold, in my opinion.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
