A week ago, everyone was worried about rising competition for streaming content platform Roku Inc (NASDAQ:ROKU). The concerns bled into the minds of some ROKU stock investors, but the company ultimately reported blowout quarterly numbers on Wednesday.
Truthfully, that shouldn’t have been much of a surprise for ROKU stock. Almost every newly public company blows estimates out of the water because analysts like to be conservative out of the gate.
But the big surprise came from that fact that growth isn’t slowing down all that much despite growing competition. In fact, active account growth (a good proxy for how quickly Roku’s reach is growing) was as strong as its been in recent memory. Consequently, unlike GoPro Inc (NYSE:GPRO) and Fitbit Inc (NYSE:FIT), ROKU stock actually exploded higher after its first earnings report as a public company.
And when I say exploded, I mean exploded. ROKU was up more than 40% in early Thursday morning trade.
But I’m not jumping on the bandwagon yet. One quarter of good growth doesn’t entirely eliminate concerns about rising competition and lack of profitability.
The Good About Roku
I’ve said before that there is a lot of good about Roku.
Namely, Roku’s business model is genius. By selling a bunch of Roku players at really low prices and generating most of its profit through ads and revenue sharing, Roku has transformed itself from a boring, low-margin hardware company to an exciting, high-margin platform company.
Roku’s earnings really played up the genius of this transition. Platform revenue surged 137% higher year-over-year, while player revenue nudged up just 4% (35% unit growth was largely offset by a 23% decline in average selling price). That means platform revenue (with a 78% gross margin versus 8% for player revenue) comprised 46% of total revenues in the quarter versus 27% a year ago.
The net result was that total company gross margins jumped more than 10 percentage points higher to 40%, while gross profit dollars nearly doubled on just 40% revenue growth.
Moreover, the low ASPs on the hardware side are lowering the consumer barrier to entry. The result is that active account growth for Roku has been on fire lately. Active accounts rose 48% in the quarter, a sharp step-up from last quarter’s 42% growth rate and roughly in-line with the 49% growth rate seen one year ago.
Clearly, the strategy of running a narrow profit in the hardware business to aggressively grow the user base and thereby buff out the platform business is working out really well.
The Bad About Roku
But just because this transition from hardware to platform company is working now doesn’t mean it will work forever.
One good quarter doesn’t put to the rest the concern that Roku is competing against the biggest and best players in the tech world. Roku’s list of competitors include Amazon.com, Inc. (NASDAQ:AMZN
), Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), among others. Those guys aren’t going away any time soon.
Sony Corp (ADR) (NYSE:SNE) just rolled out an update to its Android TVs that enables Google Assistant, Google’s AI voice assistant. Those TVs also integrate seamlessly with Google’s other smart home products.
Amazon Fire TV has a similar integration with Alexa, Amazon’s AI voice assistant. Same with Apple TV and Siri. As these companies delve further and further into smart home tech, these smart TVs will become more than just a device for streaming content. They will transform into all-in-one hubs for controlling multiple aspects of the home, including the ability to control the lights, view live home camera footage, change the temperature and much, much more.
Because Roku doesn’t have a line of smart home products like Amazon, Apple and Alphabet, Roku is at a huge disadvantage as the smart TV and streaming video markets mature, evolve and combine with the smart home market.
This is a similar situation to the one Fitbit found itself in. The company was the king of basic activity trackers, but as that market matured, evolved and morphed with the traditional watch and smartphone markets, it lost out big to Apple.
It’s also a similar situation to the one GoPro found itself in. It was the king of the action camera market, but as that market matured, evolved and morphed with the smartphone and smart glasses markets, the company lost out big, too. While Fitbit fell instantaneously, it took GoPro stock a couple quarters before it collapsed. It looks like Roku is following the GoPro trajectory.
Bottom Line on ROKU Stock
One quarter doesn’t put to rest the competition concerns that strongly challenge the longevity of this growth narrative. As the smart TV and smart home markets become more integrated, Roku will likely lose out to bigger competitors who already have a broad array of smart home products.
As of this writing, Luke Lango was long AMZN and GOOG.
