Roku’s share price gained 25% in a single day after earnings and has more than doubled this year

In November, we wrote an article analyzing the
third quarter earnings for Netflix competitor, Roku Inc. At that time, the share price was at around USD $44.00. They announced their fourth quarter earnings for 2018 last week and stunned the market, causing a 25% day close. The share price at the time of writing is at USD $64.87 – it is up over 105% so far in 2019. The market is getting excited about Roku’s future potential, with already 1 in 5 U.S. TV households now using the Roku platform to stream at least a portion of their TV viewing.

Earnings Review:

  • Ending Quarter Revenue: $275.7 million vs analyst expectations of $261.39 million (USD)

  • In 2018, total net revenue grew 45% year-over-year (YoY) to $742.5 million

  • Gross Profit increased 66% YoY to $332 million

  • Platform revenue increased 85% YoY to $417 million

  • 7.8 million added active accounts in 2018 to reach a total of 27.1 million

  • Streaming hours increased by 9.2 billion to 24 billion

  • Average revenue per user increased $4.17 to $17.95

Mark Maheney, analyst at RBC Capital Markets highlighted revenue acceleration in both platform and player segments was exceptionally strong, and was also impressed by their ad-impressions trajectory – this refers to how much views their ads receive. According to the release, the company’s monetized video ad impressions doubled in 2018 and the company expects another double in 2019. “It’s very rare to find this type of double-digit growth,” Mahaney stated.

Roku also stands to benefit from a few changes happening in their industry. For one, Disney Inc. and other content providers are looking to pull content from Netflix’s streaming service. Managing director of Investment Banking firm Needham & Co, Laura Martin quoted “Netflix’s content is getting fractured into individual direct-to-consumer channels by major media companies so the value to consumers of Roku as an over-the-top aggregator is growing” she wrote. She expects companies like Disney and AT&T Inc., will invest in marketing campaigns aimed at driving older viewers towards streaming providers. This will provide more exposure of Roku to consumers and could prove beneficial to growth.

Our Takeaways

Roku’s fourth quarter results show strong prospects for future growth. Their margins on player sales are shrinking, while active account growth is accelerating. One thing to note however, the fourth quarter is seasonally strong for companies like Roku. It’s the time of the year where lots of retail shopping is done, and they have capitalized by putting sales on their devices.

The company has ambitious plans to grow, and have boasted in their fourth-quarter shareholder letter that their U.S. active account base is large enough for them to be the second largest pay TV company. Roku has over 27 million active accounts, about half the amount as active Netflix accounts in the U.S. Roku now plans to drive growth in the
international market, and they have stated this will be one of their prime areas of investment in 2019.

Roku Shares have gained 56% over the last three months in comparison with the S&P 500’s gain of 5.3% in the same period.

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