Roku (ROKU) 2nd Quarter Earnings: What to Expect

Roku during its IPO

Roku during its IPO

Roku (ROKU) shares, one of last year’s hottest IPOs, have shot up almost 50% since it reported first quarter results in early May. Investors cheered the solid beat on both the top and bottom lines.

Even with its recent gains, analysts at Needham believe the stock can reach $60, returning an additional 30%. For those premiums to be realized, however, the content distribution specialist must convince investors it can do one important thing: make money. And on Wednesday, when it reports second quarter fiscal 2018 earnings results after the closing bell, Roku will be given an opportunity to show how close it is towards achieving that goal.

In the three months that ended June, the company is expected to deliver a loss of 15 cents per share on revenue of $141.48 million. This will be the company’s fourth earnings report as a public issue. For the full year, ending in December, the loss is expected to narrow from $2.22 a year ago to 28 cents, while full-year revenue of $607.93 million would rise 36% year over year.

The young company, which makes set-top boxes and connectivity products to stream content from the likes of Netflix (NFLX) and Hulu, has ambitions of becoming the go-to platform for TV streaming. Doubters, meanwhile, question whether its streaming platform can exist in a world where products from tech behemoths such as Apple (AAPL), Amazon (AMZN) and Google (GOOG, GOOGL) continue to grow in scale.

Indeed, this is a crowded space. But it doesn’t have to be a zero-sum market, where there are winners and losers. The entire sector continues to expand. Streaming TV content consumption more than doubled over the last 12 months, according to Conviva Data — a real-time measurement and intelligence platform for streaming TV.

“The demand for streaming TV globally is growing at a stunning rate,” said Bill Demas, CEO of Conviva. “Roku and Amazon’s Fire TV are leading the connected TV charge with growth and share of engagement.”

And when factoring the entry of streaming services from Disney (DIS) and AT&T (T), combined with the cord-cutting phenomenon that’s growing each year, there will be more than enough demand for Roku (and its competitors) to service for years to come. That said, Roku management must build confidence with the Street by showing it can execute on its stated objectives. Last quarter's results, during which platform revenue showed triple-digit growth, was a strong sample.

The strong showing in platform revenue was driven by a combination of factors, notably a 46% year-over-year surge in active accounts. Not only is Roku’s user base growing, but the company is getting those users to spend more as evidenced by the 42% spike in revenue per active account. And to top it off: profit margins, which have ranges between 71% and 77% over the past three quarters, are now trending higher.

In short, if Roku was not a hardware company — an industry notorious for weak profits -- think Fitbit (FIT) and GoPro (GPRO) -- the Street would be more inclined to give Roku the benefit of time. But the fact that the company is operating in a growing industry, while demonstrating an acute awareness towards profitability, Roku will remain on my watchlist as a possible M&A candidate.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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