With cord-cutting showing continued strength amid the novel coronavirus and the recession, Roku (NASDAQ:ROKU) stock remains very well-positioned to benefit from that trend.
In the short- to medium-term, Roku’s financial results should also be lifted by the boycott of social media websites by some advertisers and the high ad spending to promote internet TV services, such as those of Disney (NYSE:DIS) and AT&T’s (NYSE:T) HBO.
Cord Cutting Is Surging
According to a study by Roku, more than 30% of U.S. households do not subscribe to traditional pay TV services and another 25% are receiving less extensive services than previously. Nearly 50% of households in the latter category plan to eliminate their subscriptions within the next six months.
Some might say that we should be skeptical about the survey’s findings because it was conducted by Roku. But in general, the companies that provide traditional pay-TV services are reporting similar trends. For example, AT&T recently reported that its net total of premium video subscribers dropped by about 5%, or 886,000, in the second quarter versus the same period a year earlier.
Meanwhile, Comcast’s (NASDAQ:CMCSA) video residential subscriber total fell in the first quarter by a net 388,000 to 19.9 million. In Q1 of 2019, Comcast lost only 107,000 net residential video subscribers, indicating that the cord-cutting trend is greatly accelerating. And suggesting that the trend will accelerate even more in Q2, Comcast warned in April that its cable results would be further hurt by the poor U.S. economy.
Interestingly, Comcast cited the poor economy, not the lack of live sports, as the reason it expected its cable revenue to be weak going forward. And, according to Roku, less than 20% of cord cutters say they will return to paid TV when live sports return. So, it seems like the cord cutting trend is unlikely to slow greatly now that live sports have returned.
Headwinds for ROKU Stock
Among the gigantic companies now refusing to buy ads from Facebook (NASDAQ:FB) are Ford (NYSE:F), Clorox (NYSE:CLX), Verizon (NYSE:VZ), and Unilever (NYSE:UL). And several huge companies, including Starbucks (NASDAQ:SBUX), and Coca-Cola (NYSE:KO) have announced a hiatus on all social media ads.
After announcing boycotts of large social media websites, these huge companies will need to find ways to reach the many millions of young people who no longer watch TV on the traditional paid TV services. Roku is definitely an obvious candidate.
Roku stock should also benefit from huge increases in spending on ads by new streaming TV channels. According to a report by iSpot, online advertising spending tripled in 2019, exceeding $1 billion. Ad buys in the first quarter of 2020 also increased as the pandemic forced more people to stay home.
Since cord cutters are likely to be attracted to the new streaming services and many of them watch Roku, the latter company should be a big beneficiary of this surge.
And to the extent the ads on Roku cause its users to sign up for the new channels via Roku, the company will also benefit. That’s because the firm gets a commission on subscriptions that are launched from its service.
Snap’s Strong Results Bode Well for Roku
Snap (NYSE:SNAP) has much in common with Roku; both platforms are good ways for advertisers to reach young people, and both platforms have largely avoided the political controversies that embroiled Facebook and Twitter (NYSE:TWTR).
Consequently, I believe that Snap’s better-than-expected Q2 results, including a 17% year-over-year increase in revenue, bodes well for Roku and suggests that those who are bearish on Roku’s ability to grow its ad business during the pandemic are incorrect.
The Bottom Line on Roku Stock
Roku remains well-positioned to benefit from cord-cutting, and its results should also be boosted by the social media ad boycotts and increased spending on ads for new streaming channels. Trading at a reasonable trailing price-sales ratio of 14, Roku stock is worth buying at its current levels.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, oil stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he owned shares of Roku.
