Roku (NASDAQ:ROKU) provided investors with a first-quarter update on April 14. Investors liked what they heard, pushing Roku stock higher.
CEO Anthony Wood acknowledged that Roku’s advertising revenues could be softer in the short-term as companies reevaluate their marketing and ad spending. However, Wood was extremely optimistic about the company’s long-term outlook.
“We have been working closely with advertisers to help update their plans to reflect new viewing patterns and adjust their overall marketing mix, which has been affected by social distancing,” Wood stated in the company’s April 14 press release.
“While we expect some marketers to pause or reduce ad investments in the near term, we believe that the targeted and measurable TV ads and unique sponsorship capabilities that Roku offers are highly beneficial to brands today.”
If you own Roku stock, you should be excited about the company’s future, especially when it comes to advertising. Here’s why.
Active Accounts + Streaming Hours = Revenue Growth
Roku said that it finished March with 39.8 million active accounts, a net increase of almost three million accounts since the end of December. Also, it reported Q1 streaming hours of 13.2 billion, 49% higher than a year earlier.
In the first quarter of 2019, Roku finished the quarter with 29.1 million active accounts and 8.9 billion hours of streaming. That works out to 305.4 hours of streaming per active account. Fast forward to last quarter, and that average increased 8.6% to 331.6 hours.
As I stated at the end of December, “As long as the average hours streamed per account keeps moving higher, so too will the advertising revenues Roku generates.”
Now that might not happen in the near-term as advertisers reevaluate their situations, but in the long-term, this principle will continue to hold. And that’s what’s so exciting about Roku’s business model.
Here’s where Roku could have an edge on Netflix (NASDAQ:NFLX) moving forward.
Paid Vs. Free
You might have noticed that Netflix’s first-quarter global paid memberships jumped by 22.8% year-over-year to 182.86 million. It added 15.77 million net new subscribers in Q1 compared with Q4. That was more than twice the amount that analysts were expecting. Yet NFLX stock went sideways on the news.
Why is that? Parks Associates research director Steve Nason explained.
“People are consuming, not just Netflix, but all kinds of video content at an unprecedented level. It’s probably going to get a little more challenging as new entrants enter the market,” Nason stated after Netflix earnings.
“Peacock launched, and HBO Max is a huge service launching next month. Even Quibi to a much, much lesser extent. Disney Plus certainly has some type of impact. Even then, none have the original lineup that Netflix does right now.”
While Nason is right about Netflix’s content, consider Roku’s business model versus Netflix’s.
Netflix added 2.31 million net subscribers in the U.S. and Canada in Q1, its highest net total in the past five quarters. Considering Netflix only added 550,000 net subscribers in Q4, it’s a big step up.
But how many of these 2.31 million net additions are going to stick around after the crisis is over, when they aren’t forced to stay home? Nason believes Netflix is going to convert a large portion of those members to long-term viewers.
I’m not so sure. That might have been true a couple of years ago when Netflix was one of the only games in town. But as Nason states, that’s no longer the case.
Where Roku has a significant advantage is that any accounts it adds during the pandemic are likely to remain active after the crisis because Roku provides access to both free and paid content.
While Netflix has to hope its content is good enough to keep people paying its monthly subscription fee, Roku merely has to remind its advertisers that its users are very likely to stay tuned.
Given Roku’s growth, advertisers would be silly not to continue spending money on the platform.
The Bottom Line on Roku Stock
In January, I said that Roku was a screaming buy under $100. By mid-March, its shares had fallen from $140 at the start of the year to the low $60s.
Like Netflix, Roku will have a bumpy ride for the next two to four quarters. But when things get closer to normal, advertising is going to push Roku stock higher.
Just as I said in January, Roku remains a screaming buy under $100.
Should you buy some shares today? If you’re going to hold the stock for three to five years, I’d say yes. But you should retain some cash in reserve in case the shares fall below $100 again down the road.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.