Roku Shows That Profits Really Do Matter

Written by Jennifer Clark
Posted December 6, 2018 at 7:00PM

Roku (NASDAQ: ROKU) has been soaring throughout most of 2018. The company seemed unstoppable. And investors were excited about the company and what it had to offer, despite its lack of revenue.

Roku made its initial public offering (IPO) in September 2017. Its offer price was around $14. Its first-day return had the company up by 67.9%. It was a success story that some investors and analysts didn't think was possible.

It was a success story that kept getting better as each financial quarter went on. The company was seeing growth, especially where it mattered most for a company that didn't have much initial revenue to impress investors with.

Recently, Roku Senior Vice President and General Manager of Advertising Scott Rosenberg said Roku customers are streaming almost three hours a day on average. They're also interested in "free content," which means content that isn't bombarded with a bunch of advertisements.

Nothing is more irritating when you're binge-watching a show than being interrupted every 15 minutes with repeated advertisements.

Rosenberg said:

It's very clear to us at Roku that consumers are cutting and shaving the chord not just because they want more choices in the matter, but because they're looking for value. So, free is a very important selection criteria as consumers get into OTT [(over-the-top) streaming players].

It's tricky to maintain revenue while trying to keep consumers happy and grow new subscribers. But that's Rosenberg's job.

Roku Aims to Grow Its Users and Revenue

A lot of what Rosenberg works on is finding the balance between ad-free viewing that will make consumers happy and ad-supported content that will bring in revenue.

It's important for Roku to focus on bringing in revenue because it's now a publicly traded company. It needs to continually prove to investors why the company is worthy of investment.

Advertising brings in revenue for Roku, but so does its user growth. It's a fine line to walk to avoid upsetting advertisers who pay for advertising spots while not upsetting consumers with the number of ads they see when using Roku devices.

Roku has around 24 million users. It's one of the most popular OTT streaming players. That means it's beating similar devices from Amazon, Apple, and Google. But at any moment, that competition could get rigid quickly.

Blame It on Market Volatility?

At the moment, Roku might not see those bigger tech companies becoming bigger competition because they have focuses in a variety of other devices and business directions. But Roku's focus is on building its brand while expanding slowly but surely. And in a way, that makes sense.

There are some signs that Roku might be out of the honeymoon period with its investors. This month, the company announced its 2018 third-quarter financial results. The company grew its active accounts by 43% year over year (YOY) and 8.2% on a sequential basis to 23.8 million. Not to mention, streaming hours increased YOY. The average hours streamed per account in 2018's third quarter was 4.2% higher than in the second-quarter 2018. And it was 12.4% higher than in the third-quarter 2017.

But that somehow wasn't good enough for shareholders. Shareholders had been expecting platform revenue (advertising) of $103.2 million. But Roku came in $3.1 million short of the estimate. And this news had Roku's stock falling by 22% in a single day.

Over the past few months, market volatility has been high. So, learning that the company you've been investing in didn't make its revenue estimates can make you second-guess or even sell off your shares.

Roku has been rallying throughout its first year as a public company. However, one disappointing quarterly financial report is making investors skeptical. But this downside might become a bargain buy for those who've identified the long-term opportunities with Roku.

Until next time,

Jennifer Clark
Pro Trader Today

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