Roku (NASDAQ:ROKU) is poised for further upside as consumers continue stay at home and look to be entertained. Roku stock has now more than doubled since making a low near $60 in March. While the magnitude of the rally will likely lessen, look for Roku to continue to climb post-earnings. After all, the switch to cordless carriers at the expense of cable is just beginning.
Roku reports earnings after the close today. Expectations are for about $310 million in revenues and an addition of 3 million active accounts. That is a 50% increase in sales year over year and a similar increase in subscribers.
The company also saw a big pickup in new account growth and viewing hours due to sheltering in place. Netflix (NASDAQ:NFLX) saw a similar increase, when it reported earnings in April.
Shares of cable company Comcast (NASDAQ:CMSCA), however, fell as much as 7% after the release of a brutal first-quarter earnings report, which showed that the cable giant posted just $2.1 billion in net income. That’s nearly 40% less than last year’s first quarter, and this slowdown is just the beginning.
The chart below shows the relative performance year to date for both ROKU and CMCSA.
Comparing the Performance of Roku Stock
Since bottoming in mid March, Roku stock has recovered dramatically, gaining over 100%. Comcast stock, however, has struggled in comparison with only an 11% gain. Look for this to continue as novel coronavirus-based cord cutting continues.
Thanks to the pandemic, cord-cutting, an ongoing point of distress for the cable industry, will soon magnify in scope. According to a survey of 2,600 Americans released on April 21 by Trade Desk (NASDAQ:TTD), 64% of the country has either cut the cord or is thinking about it. Many TV giants are poised to weather this storm, but Comcast is not one of them. At a time when introducing new consumer features is more crucial than ever to retain customer bases, Comcast’s X1 set-top boxes may lose many of their current functionalities. This should be a big benefit for Roku stock.
Roku, unlike Comcast, is nimble and doesn’t carry litigation baggage. On April 23, the International Trade Commission ruled that the company stole intellectual property from TiVo Corp (NASDAQ:TIVO) related to the ease of searching and navigating for content on its set-top boxes. It received cease and desist orders of using said technology, just as it did in a previous ITC decision that ruled against its unlicensed use of remote access to program guide functions, which the U.S. Court of Appeals affirmed upon appeal on March 2.
Investors shouldn’t bet on Comcast purchasing licensing to mitigate the potential business damage because after the ITC ruled in 2017 that it infringed on a popular remote DVR recording function, Comcast decided to disable the feature altogether. It will likely soon face another negative ITC ruling for adding said feature back last year, but that’s another story. The crucial point here is that more business trouble will likely come if Comcast mimics the approach it took after its 2017 ITC loss by removing the additional technology that the March and April ITC and Appeals Court decisions determined it stole.
Investors would also be foolish not to consider the possibility of further penalties and legal action against the company. The ITC is already set to hear another case on Comcast’s patent theft. According to Bloomberg, members from both sides of the aisle in Congress have also scrutinized Comcast’s business practices. This could set the stage for further inquiries by Congress, the Federal Trade Commission or the Department of Justice. This spells more trouble for cable and an indirect benefit for Roku stock.
Comcast is already one of the least popular companies in the country. More consumers are considering canceling their cable subscriptions than ever before. This dwindling consumer base is only going to get smaller should it take away more of their set-top box features. For these reasons, and more, investors make the switch from CMSCA stock to Roku stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.
