Roku (ROKU) 3rd Quarter Earnings: What to Expect

Family using a Roku
Credit: Roku

Roku (ROKU) is set to report third quarter fiscal 2019 earnings results after the closing bell Wednesday. Back in September I made a case for why I thought the selloff in Roku stock was massive overreaction and buying opportunity. It turns out I was right. But have my sentiments changed and can it continue to rise?

At the time of selloff, there were concerns that the company’s platform would be threatened by competing products from tech behemoths such as Apple (AAPL), Amazon (AMZN) and Google (GOOGGOOGL). To make matters worse, in September Facebook (FB) entered the already-crowded market with its own streaming hardware, Portal TV.

That announcement had sent ROKU stock plunging more than 14%, putting 26% below its 52-week high of $176.55. The company has since roared back, reaching as high as $151, posting year-to-date returns of 380%. The company is reaping the benefits of the evolution of television where streaming will dominate for the foreseeable future. Roku’s content distribution capabilities is quickly becoming the go-to platform for streaming entertainment.

With new products such as Apple’s Apple TV and Disney’s (DIS) Disney+ on the horizon, this further expands Roku’s platform growth prospects. It also means expectations are high.

In the three months that ended September, the Los Gatos, Calif.-based company is expected to lose 28 cents per share on revenue of $256.1 million. This compares to the year-ago quarter when the company posted a 9-cent loss on revenue of $173.4 million. For the full year, ending in December, the loss is expected to be 50 cents per share, while full-year revenue of $1.10 billion would rise 47.9% year over year.

While there continues to be concerns about the company’s end market, Roku management is diversifying the business to capitalize on more revenue streams, which hinges on engagement with the platform. Among other things, this platform revenue includes licensing deals with Roku makes with smart-TV manufacturers. And this is important because Roku’s operating system is in about a third of all smart TVs sold in the United States of the first six months of the year.

Then company is also focused on growing its advertising revenue as well as the money Roku receives from subscriptions made on the Roku platform. These collective businesses are growing rapidly. In the second quarter, Roku’s revenues rose 59% to $250 million. Of that total, platform revenue jumped 86%. Just as impressive, the company added 1.4 million net account additions, giving it a total of 30.5 million. Of that total, average revenue per user jumped $2.00 from the first quarter to land at $21.06.

In other words, the company is capitalizing strongly from the cord-cutting phenomenon. Nevertheless, on Wednesday Roku will need to show that it can sustain (if not improve) on these numbers. On Wednesday the company must affirm this level of optimism by delivering a beat-and-raise quarter and outlining its path towards profitability and justifying to the market whether it deserves its premium price tag.

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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