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This Important Roku Metric Continues to Climb

Roku's (NASDAQ: ROKU) third-quarter earnings report didn't live up to the extremely high expectations set by the market -- the tech stock was trading about 40% higher from its September low. But long-term investors should have a lot to like about Roku's earnings report.

Roku provides a few important user metrics at the top of its letters to shareholders: active accounts, total hours streamed, and average revenue per user. All three numbers saw strong growth last quarter. But combining those numbers provides some important insights.

Dividing streaming hours by active accounts is a good metric to see how engagement is improving on Roku's platform. The more engaged Roku's users become, the greater the opportunity for the company. Last quarter, users spent, on average, more than 318 hours streaming content on their Roku devices. That's up 22% from an average of around 260 hours in the third quarter last year. Comparing that to average revenue per user (ARPU) growth of 30% last quarter shows Roku is monetizing time spent on the platform more efficiently.

A Roku remote sitting on a table next to a bowl of popcorn.

Image source: Roku.

More engagement coming

Roku has done an excellent job driving engagement growth over the past year, but that number could move higher still over the next year.

Roku will see the benefit of the launch of new streaming services from Apple, Disney, AT&T's WarnerMedia, and Comcast's NBCUniversal throughout the next six months. During the company's third-quarter earnings call, Analysts expressed concern that the commercial-free services could have negative impact on the advertising business. Management, however, believes the new services will drive greater overall engagement on its platform.

That increased engagement could be driven by accelerated cord-cutting in 2020. Traditional pay TV will lose about 6.2 million subscribers next year, according to analysts at UBS. That's a 6.7% rate, accelerating from an estimated 6.2% this year. As more consumers opt for streaming instead of traditional TV, Roku is well positioned to capitalize on the shift in viewing and the shift in ad budgets.

"Our biggest competition is attracting linear-TV ad spending out of linear into [over-the-top]. That is the competition," Scott Rosenberg, Roku's head of the platform business, said during the earnings call. Roku's ad business remains more demand-constrained than supply-constrained -- that's part of the reasoning behind the Dataxu acquisition -- so increased streaming time and decreased linear-TV viewing are good for its business.

One headwind to be aware of

Roku added a new feature to its latest operating system update, which will identify if a streaming channel has been open for an extended period of time without user interaction. It'll prompt the user for input, and automatically close the channel if it doesn't get a response. Management says the move will have a negative impact on streaming hours.

That said, it doesn't expect the change to have a material impact on its finances. Some of the more popular streaming services, like Netflix, already implement similar features. The new feature built into the OS gives customers and advertisers a consistent experience across all channels. That should help increase the value of ads across the platform.

To see if the strategy is working, investors need to watch the gap between streaming hours per user and average revenue per user. It should increase over the next year as streaming hours become a better indication of a user actively viewing (and not asleep in front of the TV). The introduction of new premium streaming services could increase unmonetizable streaming hours on Roku's platform, but the overall growth in engagement should be a boon to Roku's business, especially in the long run.

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Adam Levy owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends Apple, Netflix, Roku, and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, long January 2021 $60 calls on Walt Disney, and short January 2020 $130 calls on Walt Disney. 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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