The only constant thing in the stock market, it seems, is change. And there’s change afoot at Roku (NASDAQ:ROKU) as stockholders can’t assume that streaming device sales will remain robust.
Covid-19 took a toll on multiple sectors of the economy. Some companies have thrived while others continue to struggle. Roku, as evidenced by the company’s first-quarter earnings data, has experienced a mix of positive and negative outcomes.
Deciding whether to own Roku stock or not requires a nuanced analysis of the good news and the bad. All in all, the data suggest that even amid a pandemic, Roku should be able to adapt to changing market trends and conditions.
Changing with the Times
When the economy undergoes a foundational change, it’s wise to invest in companies that can make the most of its advantages. In this context, it would make perfect sense for Roku to pivot its business away from equipment and towards its platform.
In other words, Roku should follow the money trail. Given the company’s first-quarter earnings figures, we can see exactly where that trail is leading. Roku’s quarterly revenues totaled $320.8 million. This can be broken down into $88.2 million derived from Roku’s player business and $232.6 million sourced from the company’s platform business.
Thus, the fiscal trail leads directly to Roku’s platform revenues, which include profits from advertising as well as licensing revenues. Clearly, these revenue sources greatly contributed to Roku’s impressive revenue beat. As a point of reference, the analyst community was expecting $305 million in quarterly revenues.
Besides, from a growth standpoint, Roku’s platform business has been outstanding as it increased 73% in the first quarter. Also during that quarter, Roku’s platform grew in terms of active accounts. Specifically, the number increased by 2.9 million to a total of 39.8 million by the quarter’s end.
Widespread stay-at-home orders undoubtedly contributed to this. It’s unfortunate that so many people are stuck in their homes, but this change seems to have increased user engagement on Roku’s quickly growing platform.
Realistic Expectations for Roku Stock
A 73% expansion in Roku’s platform business might be considered exceptional. And it’s reasonable to assume that it won’t continue to grow at that pace. The reality of the pandemic is that companies and shareholders should expect business activity slowdowns throughout 2020.
In anticipation of this, Roku seems to be successfully straddling the fine line between optimism and realism. “We anticipate that our ad business will deliver substantial revenue growth on a year-over-year basis, albeit at a slower pace and lower gross profit than we originally expected for the year,” the company projected.
This projection should not be a major cause of concern. Roku is simply affirming the high probability that the pandemic will have an impact on revenue growth and gross profits. The fiscal picture before and after the pandemic will be quite different, after all.
Nevertheless, Roku stock investors can remain confident that the company is well positioned for changing market trends. With stay-at-home mandates in place, streaming content has taken center stage as a primary entertainment source for many families.
This phenomenon should prove to be net positive for Roku. In the company’s words, it could enable the company to “accelerate [its] path to greater platform scale.”
And so, instead of fretting over streaming-equipment sales, Roku is taking the path of least resistance by pivoting toward its platform business. Why fight the tide when you can surf the wave instead?
The Final Word on Roku Stock
As long as our expectations are realistic, we can expect more growth from Roku as the company capitalizes on its strengths. For the foreseeable future, albeit possibly at a slower pace, the company’s platform business should drive Roku stock to higher prices.
Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
