Roku
ROKU
is one of only a few pure-play streaming TV stocks, alongside Netflix
NFLX
. The company that became known for its small streaming TV devices has destroyed NFLX over the last several years and its growth outlook appears stronger than the world’s biggest streaming TV platform. Plus, it’s exposed to the entire industry, including newcomers like Peacock and it’s set to benefit from the rapid expansion of digital ad spending.
Roku shares rest about 15% off their mid-October highs heading into the release of the company’s Q3 FY20 financial results that are due out after the closing bell on Thursday, November 5.
Plugged into the Entire Streaming Market
Netflix closed Q3 with 195 million global paid subscribers, and it projects it will add 6 million more during Q4, as people around U.S. and the globe continue to dive into streaming. NFLX’s growth helps showcase how huge the streaming market is. And the company’s success is part of the reason why everyone from Disney
DIS
to Apple
AAPL
have jumped into the space.
Roku stands to benefit from the secular shift from linear TV to streaming. The firm, which went public in 2017, rose to prominence via its small devices that plug into TVs and allow users to watch streaming TV content from Netflix and countless others, including Amazon Prime Video
AMZN
. Roku predicted earlier in the year that “roughly half of all U.S. TV households will have cut the cord or never had traditional pay TV” by 2024. And the coronavirus helped accelerate this push.
Roku currently sells multiple streaming TV players and its operating system is built into various smart TVs. In fact, Roku TV sales account for one in three smart TVs sold in the U.S. And the firm is one of the leaders in the streaming device industry alongside Amazon Fire TV, Google Chromecast
GOOGL
, and Apple TV. It also now sells wireless sound systems.
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On top of this, Roku is set to expand through the proliferation of advertising across the streaming ecosystem. The company is able to attract advertisers via its Roku Channel that allows users to watch free streaming movies and TV shows. Plus, Roku sells ad space across its marketplace, enabling marketers to buy targeted ads, promote their streaming offering, and more. This growth is helped by its fall 2019 purchase of demand-side ad platform firm Dataxu.
Looking back, Roku’s fiscal 2019 sales surged 52% to $1.13 billion, with its ad-heavy and subscription-focused platform sales up 78% to $741 million. More recently, Roku reported a narrower-than-expected loss in the second quarter, while its revenue jumped 42%. Meanwhile, its platform sales climbed 46% and accounted for just under 70% of total sales.
The company added 3.2 million active accounts and closed the period with 43 million. This helped its streaming hours climb 65%. It’s worth remembering the coronavirus is poised to shake up the movie theater and broader entertainment business for a while. And Roku is slowly expanding its international reach.
Outlook
Zacks estimates call for Roku’s third quarter revenue to climb 42% to match Q2’s top-line growth. The firm’s overall fiscal 2020 revenue is then projected to jump over 41% to reach $1.59 billion, with FY21 expected to climb another 34% higher to hit $2.13 billion. This would follow 52% sales expansion in FY19 and 45% growth in FY18.
Some investors might be disappointed to learn that it’s projected to post a bigger adjusted loss this year. Luckily, it is expected to shrink its loss in FY21. And the company’s overall earnings outlook has trended in the right direction and it boasts a solid history of quarterly earnings beats.
Bottom Line
Roku stock, which is a Zacks Rank #3 (Hold) at the moment, closed regular trading Tuesday at $203 per share, down 15% off its highs from just a few weeks ago. This could set up a solid buying opportunity for investors high on the streaming firm.
The election and the virus present some near-term uncertainties that might make it prudent to see how its actual results come in and how the market reacts. That said, the company appears to be worth considering as a longer-term play on the booming streaming TV market.
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