Markets

Roku Stock May Be Down, but It's Not Out -- Not by a Long Shot

It was inevitable. After putting up blistering 360% gains so far in 2019, Roku (NASDAQ: ROKU) has come crashing down. In the wake of the company's third-quarter earnings report, the stock plummeted as much as 20% from the previous day's close, though it's lately down about 11%.

Roku's financial results were better than expected, with modest beats on the top and bottom line. The company even raised its full-year forecast, but the guidance was lower than some investors had hoped for, sending the stock tumbling.

Let's review the quarter to see what the future holds for the streaming pioneer.

A Roku TV showing shortcuts to Netflix, HBO Now, and The Roku Channel.

Image source: Roku.

Strong growth continues

Roku reported revenue that soared 50% year over year, to $260.9 million. It sailed past both the high end of management's guidance and analysts' consensus estimates, which topped out at $255 million and $257 million, respectively. 

Even more impressive were the results of its platform segment, which grew 79% year over year, showing impressive results from advertising, The Roku Channel, and its connected TV operating system. Sales of Roku-branded TVs and streaming devices drove revenue from the player segment, which grew 11%, compared to the prior-year quarter.

The company's focus on the platform business continued to bear fruit, as gross margins from the segment of 62.6% easily exceeded the 7.6% produced by the player segment. This is by design, of course, as Roku sells its players near cost as a way to increase the number of viewers accessing its platform.

Operating expenses grew 60% year over year as Roku continues to sacrifice profits for the sake of overall growth, causing its spending to rise faster than sales. Research and development, sales and marketing, and general and administrative expenses grew 51%, 82%, and 51%, respectively, year over year as the company works to command greater market share in the fast-growing, ad-supported streaming-video space.

Even in light of its heavy spending, Roku once again delivered results that were better than it forecast. The company reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $0.4 million, far better than the loss in a range of $5 million to $11 million it had forecast.

Roku produced a GAAP net loss of $25.16 million, compared to a loss of $9.53 million in the year-ago quarter. This resulted in a loss per share of $0.22, versus a loss of $0.09 this time last year, and better than the $0.28 loss expected by analysts. 

Other metrics are also soaring

Roku reported active accounts that grew to 32.3 million, up 36% year over year, slightly lower than the 39% growth it posted in Q2. Streaming hours grew to 10.3 billion, up 68% compared to the prior-year quarter.

Roku's monetized video ad impressions more than doubled year over year, led by an even stronger performance by The Roku Channel, and the average revenue per user climbed to $22.58, up 30%.

The company said it continued to be the No. 1 licensed TV operating system in North America, representing one in three smart TVs sold in the U.S. during the first nine months of this year.

The Roku Channel showing on a smartphone.

Image source: Roku.

An important acquisition

Late last month, Roku announced that it would acquire privately held dataxu. The company boasts a demand-side advertising platform that helps marketers plan and buy video ad campaigns. This deal will help reinforce Roku's position in the advertising space, providing automated bidding and self-service software that helps manage programmatic ad campaigns across a variety of digital platforms.

On the conference call, CEO Anthony Wood said: "Today, our ads that we sell are mostly sold direct. But we think the ad buying is going to become more automated over time and this acquisition's primary goal is to accelerate our road map for our ad tech."

The company is banking on the gradual transition that is taking place, as advertisers are slowly moving a portion of their ad spending from traditional broadcast TV to ad-supported streaming services. The acquisition of dataxu gives the company additional data and measurement capabilities, while also expanding its existing advertiser base.

Quarterly guidance was strong, but not strong enough

For the upcoming fourth quarter, Roku is forecasting net revenue in a range of $380 million and $396 million, which would represent year-over-year growth of between 38% and 44%. The company is also guiding for a net loss of between $17 million and $22 million, compared to net income of $6.78 million in Q4 18. Analysts' consensus estimates for the quarter were calling for revenue of $386 million and a loss per share of $0.04. Investors were likely expecting a much more robust forecast, given Roku's historically strong growth.

Roku's falling share price post-earnings was mostly the result of its meteoric rise so far this year and its frothy valuation. Even after today's slump, the company has a trailing-12-month price-to-sales ratio above 15, while many investors believe a more favorable price-to-sales ratio falls between 1 and 2.

It's easy to get caught up in the quarterly machinations of Wall Street, but with a technology stock like Roku, which sits at the leading edge of a paradigm shift -- from broadcast television to streaming -- it's best to ignore the noise, tuck away those shares, and check back later. You'll be glad you did.

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Danny Vena owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

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

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