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As It Becomes a Heavy-Hitter in Ad Technology, Roku Stock Is Set to Soar

Roku’s (NASDAQ:ROKU) outstanding second-quarter results show that the company is well-positioned to become a true advertising giant that rivals Facebook (NASDAQ:FB) and Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Google. As a result, bears’ concerns about Roku stock are completely unfounded.

ROKU Stock Will Continue Benefitting From the TCL Partnership

Source: Michael Vi / Shutterstock.com

Reported on Aug. 4, Roku’s Q2 results showed that the company is gaining users extremely rapidly, while the amount of money that advertisers are spending on the platform is growing tremendously. The company’s business is definitely exploding as a result of the cord-cutting megatrend, while it has left rival providers of streaming operating systems in the proverbial dust.

Roku’s user base surged 41% year-over-year to 43 million, and its streaming hours soared a truly impressive 65% YOY to 14.6 billion. The company’s user growth was the highest ever for a quarter that did not fall during the holiday season.

And despite the challenges posed to advertising by the pandemic, the revenue of Roku’s flagship Platform business soared 46% YOY, and the firm’s overall gross profit jumped 29% YOY.

A Closer Look at ROKU Stock

Importantly, the company reported that “Strong, active account growth has continued into early Q3,” adding that there was “continued strong growth in active accounts and player sales and TV into early Q3, which is encouraging.”

I don’t believe that Roku would use such upbeat language to describe its business in early Q3 unless its growth was accelerating, continuing at roughly the same pace as in Q2 or dropping very little versus Q2.

That, in turn, means that Roku’s strong growth is not dependent on lockdowns, but will likely continue to be strong as the lockdowns end.

Moreover, Roku’s monetized video ad impressions surged  50% YOY, and its average revenue per user, or ARPU, rose 18% YOY to $24.92. That data indicates that the company’s ad prices have stayed fairly strong, despite the pandemic and recession.

Among the other factors that weighed on the company’s bottom line were an acquisition and the expansion of its sales team. Consequently, Roku’s gross margin dropped 4.4 percentage points YOY, and it reported a Q2 loss of $42.2 million, versus a loss of $10.4 million during the same period a year earlier.

But spending related to its acquisition is likely to drop going forward, and Roku’s profitability will accelerate as it continues to grow. Further, the company will benefit greatly from the rebound of the economy after a vaccine for the novel coronavirus is introduced.

Roku’s Technology and International Business Will Be Growth Engines

Roku is benefiting from its use of technology to benefit advertisers, and the company is poised to generate a huge amount of revenue and profits overseas.

In June, Roku announced a deal with Kroger (NYSE:KR). Under the agreement, Roku will provide data to the supermarket chain to help it assess “campaign performance across the Roku platform.”

The partnership will help Kroger measure the performance of its ads on conventional telvision. It will also enable Kroger to use its own data to “enable…targeting and ultimately optimization of ads,” Roku stated.

The company noted that canned-soup giant Campbell’s (NYSE:CPB) has also agreed to participate in a similar deal. Roku indicated that it will make many of those types of deals with other consumer-packaged goods  companies.

Further, Roku’s OneView offering enables advertisers to launch highly targeted ads, “calculate OTT ad inventory availability in seconds, and “guarantee certain demographic delivery or business outcomes like website visits or mobile app downloads.”

On the international front, Roku reported that “in Canada and the UK, in the quarter player sales doubled year-over-year,” while it has a 25% share of new smart TVs in the country.

The company also noted that it made a partnership deal with giant TV maker Sharp in Mexico, where it has deals with six TV makers. Importantly, Roku added that its overseas accounts are growing more quickly than in the U.S.

The Bottom Line on Roku Stock

Roku’s overall growth appears to be accelerating, and its ad business is expanding rapidly, despite the pandemic. Given the continued rapid growth of cord-cutting, the resurgence of advertising that is likely to accompany the end of the pandemic, Roku’s impressive technological innovations and its gigantic overseas opportunity, the medium-term and longer-term outlook of Roku stock continues to be extremely bright.

Moreover, trading at less than ten times analysts’ average 2021 sales estimate, Roku stock has a much more reasonable than many of its high-growth peers. Given all of these points,  I continue to recommend that longer-term investors buy the shares.

As of this writing, Larry Ramer owned shares of Roku stock. Larry 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. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/heavy-hitter-ad-technology-roku-stock-set-to-soar/.

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