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Ignore Roku’s Post-Earnings Volatility and Trust the Numbers

Long-side traders quickly gave up their gains after the company's fourth-quarter earnings report

Earnings season is my favorite time of the year. However, there’s no denying that it can also be a very confusing time for investors. Case in point: Roku (NASDAQ:ROKU). Wall Street initially cheered the company’s fourth-quarter earnings results, but then changed its tune the very next day, resulting in Roku shares dropping 12%.

Roku Stock Erases Initial Post-Earnings Gains: What You Need to Know
Source: Michael Vi /

That’s not exactly a love letter on Valentine’s Day, but it did send a message to prospective long-term investors. Roku stock may struggle to hold Wall Street’s interest.

Are the naysayers right to raise their eyebrows, or is Roku’s sudden slide another typical head-fake on the way to richer valuations?

New Decade, New Viewing Habits

Before we delve into the numbers — and the reason for the pop and drop in Roku stock — I want to take a moment to discuss Roku’s letter to shareholders. Often this type of letter merely rehashes the highlights of a company’s earnings figures and latest initiatives, but I espied something bolder this time around: a dire warning for cable-television purveyors.

If we’re to believe Roku, a literal halving of the old-school television market is afoot:

“Millions of consumers, the biggest names in media, leading advertisers and global TV brands are embracing streaming. … [Viewers are spending] more time streaming and less time in traditional pay TV, and many consumers are leaving the legacy pay TV ecosystem entirely. We predict that by 2024 roughly half of all U.S. TV households will have cut the cord or never had traditional pay TV. … We have now entered the streaming decade when we believe consumers around the world will choose streaming as their primary way of viewing TV.”

That’s an audacious prediction, to be sure, but few would deny the momentum of the streaming revolution. Between Netflix (NASDAQ:NFLX), Disney’s (NYSE:DIS) Disney+, and Apple’s (NASDAQ:AAPL) Apple TV+, the erosion of the legacy pay TV ecosystem seems, to put it nicely, prone to acceleration. This macro-level catalyst, along with the numbers we’re going to talk about in just a moment, should help you to see the bull side of the debate as we embark upon “the streaming decade.”

A Streaming Upstart Beats the Street

With that in mind, let’s take a look at Roku’s fourth-quarter report. Wall Street expected $391.6 million in revenues while Roku delivered a pleasant surprise with $411.2 million. That constitutes a 49% year-over-year increase. The company reported a loss of 13 cents per share, versus consensus estimates for a loss of 14 cents. Moreover, Roku’s active accounts total jumped to 36.9 million. The company added 4.6 million in Q4 and 9.8 million during 2019.

As I stated, Wall Street was surprised, but why? With giants like Disney and Apple jumping into the streaming fray — and with NBCUniversal and WarnerMedia potentially launching services of their own — Roku can let the streaming contenders fight among themselves, all the while providing streaming equipment and riding the wave to another banner year.

What might that year look like? Roku’s outlook is ambitious but, I believe, not unrealistic:

“In 2020, we expect to reach $1.6 billion in revenues, or roughly 42% year-over-year growth. We estimate total gross profit will grow … to approximately $730 million, 47% year-over-year growth at the midpoint.”

So what’s really behind the stock’s post-earnings oscillation? In this case, the likely culprit is what I call “analyst hangover.” I’ll give you a couple of examples: Macquarie Research’s Tim Nollen griped that Roku’s earnings results were “a bit below our admittedly bullish estimates,” while Olivetree Financial’s Dan Forman similarly complained, “The mix in the quarter was less robust than we would have liked.”

Sizing Up Roku Stock

I’m a numbers guy, so when expectations and reality collide, I will always go with the numbers. And in this case, Roku’s numbers are more than enough for me even if they evidently disappointed a handful of hopefuls.

And so, the sell-side analysts will unfortunately have to nurse their hangovers on their own. This stock holds a firm “B”-rating in my Portfolio Grader. It remains a solid bet on the “Decade of Streaming” that’s just getting started.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

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