Roku Stock’s Magic Metric: Average Revenue Per User

Roku (NASDAQ:ROKU) is seeing its shares continue their tentative recovery. ROKU stock got a much-needed boost after the company delivered a first-quarter earnings beat on May 6. However, at its May 18 $314.21 open, Roku remains off its February peak of $486.72 — an all-time high. We’ve seen ROKU stock start to claw its way back several times since then, but those recoveries have never taken hold. Whether it sticks this time or not, ROKU shares are still cheaper than they’ve been for months, and the long-term growth potential for this stock is considerable.

Roku logo displayed on tv screen in modern living room

Source: AhmadDanialZulhilmi / Shutterstock.com

Roku has a lot of appeal, even though many people make the mistake of dismissing it as a video streaming play. That hardware gave the company the early edge that made it the top streaming platform in U.S. homes. But Roku has grown to a dominant streaming platform, with its software also found on millions of smart TVs. And the company is successfully monetizing all those Roku users. That spells long-term growth potential for Roku and ROKU stock.

Roku’s Killer Quarter

A week ago, I wrote about Roku’s killer quarter. The company just plain hit it out of the ball park in the first quarter. Total revenue was up 79% year-over-year. Roku added 2.4 million active user accounts. Platform revenue was up 101%. Average revenue per user grew 32% YoY. The company’s Roku Channel is now in 70 million American households.

Wall Street had been expecting a loss of 13 cents per share for the quarter. Instead, Roku delivered a surprise profit of 59 cents per share. The big earnings win was also a win for shareholders. ROKU stock popped 11.5% the next day and kicked off what could be a recovery after bottoming out at a 2021 low of $272.41 on May 6.

There are a lot of impressive numbers in there, but I want to focus on one at this point: average revenue per user, which hit $32.14 for the quarter.

ARPU Trend is Good News for ROKU Stock

Average revenue per user (ARPU) is a very useful measurement of how well Roku’s overall business model is working. Knowing how much revenue the average user generates gives an indicator of the company’s performance in areas like paid advertising on Roku Channel and subscriptions to premium streaming services. This is especially critical for a company like Roku that primarily operates as a platform instead of focusing on charging users a monthly subscription fee. Rising ARPU is an indication that those users are seen as being more valuable by advertisers. It’s also a sign to investors that Roku’s strategy is working.

Roku’s ARPU for Q1 2021 was $32.14, up 32% YoY. That is the kind of trajectory investors want to see. And Roku is consistently nailing it — this wasn’t a one-off that could be attributed to the pandemic. In Q1 2019, ARPU was $19.06, a 27% YoY gain. For Q1 2020, it was $24.35, which was a 28% increase.

You might be surprised to learn Roku’s ARPU is considerably higher than that of some of the biggest video streaming services.

Bottom Line on ROKU Stock

I’ve talked previously about risks inherent in a Roku investment. The company’s otherwise stellar Q1 numbers did show the pace of new subscriber additions is beginning to slow. The company also warned that the growth rate of ad spending is likely to slow — advertisers really upped their game in the second half of 2020. In addition, the global semiconductor shortage may impact production of Roku hardware and TVs that run Roku software.

I’ll take those risks. This “B” rated Portfolio Grader stock is showing signs of recovery, but still trades a full third lower than its February levels. The investment analysts polled by the Wall Street Journal are pretty confident ROKU stock will make that up. They have Roku rated as overweight with an average $464.85 price target.

That kind of upside is the icing on the cake, and suggests that Roku is on a long-term growth trajectory.

On the date of publication, Louis Navellier had a long position in AMZN. 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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