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Wed, September 30 at 4:00PM ET

Don’t Worry About the Post-Earnings Weakness of Roku Stock

Roku's Q2 earnings report was quite good, so this minor post-earnings selloff of Roku stock won't last very long

Roku (NASDAQ:ROKU) stock dropped meaningfully last week. The decline came after the company reported second-quarter numbers that beat analysts’ average expectations, but didn’t quite live up to some investors’ super-charged predictions.

ROKU Stock Will Continue Benefitting From the TCL Partnership
Source: Michael Vi / Shutterstock.com

Long-term investors shouldn’t be worried about the post-earnings weakness of Roku stock.

Overall, Roku’s Q2 earnings report was quite good. Its fundamentals remain rock-solid. The firm’s growth drivers remain vigorous. And Roku’s management continues to execute very well, while it still has huge long-term opportunities.

Over the next several years, Roku looks poised to continue to rapidly increase its revenue and profit. All of that growth will keep Roku stock on a winning trajectory over the long-term.

Sure, the stock is running into worries about valuation now. Let those concerns take some of the hype out of Roku stock. Then buy the dip and hold it for the long-haul.

Roku’s Earnings Were Good

Don’t let the selloff  of Roku stock fool you. Roku’s Q2 earnings report was very good.

On the engagement side, the growth of the number of users in the Roku ecosystem accelerated sharply. The amount of time they spent watching content on Roku also accelerated. Roku reported 41% year-over-year active account growth in the quarter, a sharp acceleration from Q1 and the company’s best YOY account growth since the third quarter of 2018. Meanwhile, its streaming hours rose 55% YOY, also a sharp acceleration versus Q1.

Underpinning this robust engagement growth was Roku’s continued dominance in established Smart-TV markets. In America, one out of every three Smart TVs purchased in the quarter was a Roku TV. In Canada, Roku’s TVs accounted for one out of every four Smart TVs purchased.

So, from a usage, engagement and reach perspective, Roku delivered very impressive results. The company continued to dominate the Smart-TV market, leading to huge account growth, and consumers continued to pivot from conventional to streaming TV. As a result of these trends,  the number of hours spent on Roku’s platform jumped tremendously.

Meanwhile, Roku’s software business was quite resilient in Q2. Its average revenue per user rose 18% YOY, powering 42% total revenue growth. For perspective, global digital-ad spending dropped 5% YOY in Q2, while total TV-ad spending fell 24%. So the fact that Roku reported 18% ARPU growth and 42% revenue growth shows the non-cyclical strength of Roku’s streaming-TV ad business.

On the negative side, the gross margin of Roku’s platform business fell tremendously YOY, and its operating spending rose 52%, pushing its earnings before interest, taxes, depreciation and amortization (EBITDA), excluding some items, into negative territory.

The market is presently choosing to focus on those negative aspects of Roku’s results. But they were mostly caused by Covid-19 adversely impacting the company’s revenue growth. Once the overall ad-spending market rebounds, Roku’s revenue growth rates will charge higher, its margins will recover and its losses will turn back into profits.

So Roku’s quarter was very good, with very fixable negatives that don’t warrant much concern.

Big Long-Term Opportunities

Taking a step back, it’s clear that Roku’s management is executing strongly against some very big long-term opportunities.

Those opportunities almost entirely center around the pivot of both consumption and advertising from conventional to streaming TV.

Long story short, consumers are increasingly migrating from watching ABC, ESPN and their local channels to watching Netflix (NASDAQ:NFLX), Disney+, Hulu, YouTube TV, etc. They’re switching mostly because the latter group of streaming services is cheaper, more convenient, and has on-demand content.

Ad dollars chase eyeballs. So a high percentage of the ad dollars that are going into conventional TV are going to inevitably move into the streaming-TV channel.

TV ad spending in North America amounts to $70 billion annually. Globally, it comes in at $170 billion.

Most of that $170 billion will make its way into the streaming sector over the next five to ten years, likely resulting in huge growth for platforms, including Roku, that sell streaming-TV ads.

Executing Strongly

Roku’s management is doing everything right today to ensure that it will have the most valuable streaming TV ads in the market.

Specifically, through effective manufacturing partnerships and strong hardware offerings, Roku is dominating the smart-TV market. It has a 33% share of the smart-TV market in America and a 25% share of the sector in Canada. This dominance basically means that consumers in the market for  a smart TV will probably end up buying a Roku TV, meaning they will likely end up in the Roku ecosystem.

As long as this remains true, Roku will continue to have the most users and eyeballs among streaming platforms. In advertising, eyeballs matter more than anything else.

At the same time, Roku’s management is working tirelessly to improve the platform’s ad capabilities. Case-in-point: Roku recently launched a new shopper-data partnership with Kroger (NYSE:KR). The deal allows Kroger to use its retail=purchase data to create hyper-targeted ads on Roku.

Such improvements will ensure that Roku’s platform continues to have the most robust ad capabilities in the streaming-TV space.

Roku’s ad business is poised to eventually have the most eyeballs and the most robust capabilities. Simple translation: Roku is clearly well-positioned to turn into the Facebook (NASDAQ:FB) of streaming-TV advertising.

Buy Roku Stock on Weakness

It’s fair to say that, heading into Roku’s Q2 earnings report, its stock was fully priced for all this growth.

After all, the shares were trading at 12-times forward sales heading into the print. It’s only natural that imperfect numbers knocked this perfectly valued stock off its peak.

But this selloff won’t last. That’s mostly because the company’s margin challenges won’t last and because its non-cyclical growth drivers remain vigorous.

So my advice is simple.

Let this storm happen. Let the stock be weak for a few days as investors do some profit-taking. Wait for some technical resistance to show up. Wait for the bottoming-out process.

Then buy the dip.

Roku stock is a name that long-term investors should own.

The Bottom Line on Roku Stock

Roku will be a winner over the long-term. Right now the stock is experiencing near-term weakness due to some short-term challenges. Those difficulties will soon pass.

When they do, Roku stock will get back to its winning ways, powered by a non-cyclical pivot in consumption and ad dollars from conventional to streaming TV.

So buy Roku on weakness and hold it for the long-haul.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.  As of this writing, he was long ROKU, NFLX, and FB.

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/dont-worry-about-the-post-earnings-weakness-of-roku-stock/.

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