Roku (NASDAQ:ROKU) holds an interesting position in the video streaming war. The company is a long-time player — a streaming pioneer, really. Roku hardware and smart TVs running Roku software are in more American homes than any competing systems. Those Roku devices are typically used to access other streaming video services. However, Roku’s strategy of selling advertising on its free Roku Channel is increasingly paying off. In its latest quarter, the company beat analyst expectations and posted a surprise profit. The market responded with an 11.6% pop for ROKU stock.
A month ago, I wrote that the Roku Channel was likely to pay off for the company, making ROKU stock well worth considering. My timing was a little off. ROKU continued to slide. But the company’s first-quarter earnings win shows that the Roku Channel has been a smart move.
I suspect the worst of the stock’s 2021 slump is now behind it. In which case, now would be the time to make a move if you want to add this video streaming pioneer to your portfolio.
A Killer First Quarter Boosts ROKU Stock
In February, Roku delivered its full-year 2020 numbers. They were very good. Revenue was up 58% year over year, the company added 14.3 million active accounts and platform revenue was up 71%. It’s no coincidence that in February, ROKU stock was trading at all-time highs.
Analysts weren’t expecting the picture for the first quarter to be quite so strong. Wall Street was looking for Q1 revenue of $490.6 million, with a loss of 13 cents per share. The reasoning was that much of that 2020 performance was attributable to the coronavirus pandemic. People were staying at home and starved for entertainment. With vaccinations under way and the country opening up, being parked in front of a TV would be losing its appeal.
Roku proved the sceptics wrong. Revenue for the quarter grew 79% YoY, hitting $574.2 million. Platform revenue was up 101% YoY. The company added 2.4 million new active user accounts and the average revenue per user grew 32% YoY. Roku even beat its own projection for a loss on the quarter, instead delivering earnings per share of 59 cents.
The company’s Roku Channel now reaches 70 million U.S. households. That growth has helped to drive advertising revenue for free content, and generated the cash needed to fund original content. This, in turn, helps generate more ad revenue, in what Roku describes as the “Roku Channel flywheel.”
The big earnings beat sent ROKU stock to a $317 close, a single-day gain of 11.6%.
There Are Risks
While the news from Roku was mostly positive for investors, the company did warn it faces potential headwinds. Analysts were quick to note that the pace of adding new active user accounts had slowed. It was up nearly 35% YoY, but that is the slowest pace of new account acquisitions in several years.
Among Roku’s identified areas of concern are the expected slowdown in growth of ad spending (especially compared to the second half of 2020 when advertisers began spending big after clamping down early in the pandemic). The company is anticipating supply chain issues to persist through 2021 — impacting margins for Roku streamers and potentially disrupting Roku-equipped TV sales. And while Roku expects the addition of active user accounts to be better than pre-pandemic levels, with a return to normalcy the huge YoY growth numbers posted in 2020 may not be attainable.
Bottom Line on ROKU Stock
Factor out the slump that ROKU stock has been in since mid-February, and the growth picture is impressive. In the order of 1,670% over the past 5 years. It’s hard to argue against that kind of return.
On the other side of the coin, as a Portfolio Grader ‘B’ rated stock, the picture isn’t all roses. Roku itself has identified a number of potential headwinds to be faced. However, the company still sees “significant long-term opportunity ahead” and I think that nicely sums up the case for ROKU stock.
Significant long-term growth opportunity ahead.
On the date of publication, Louis Navellier had a long position in ROKU. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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