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Are Investors Unfairly Punishing Roku Stock?

By Eric Volkman - Feb 23, 2018 at 5:45PM

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The stock took it on the chin, sliding 20% after the company's latest earnings report.

Roku's (ROKU -5.71%) latest set of quarterly results really turned off investors. In the wake of the earnings release, shares have declined about 20%.

At first glance, it's a bit puzzling. After all, the streaming device maker exceeded estimates for revenue and posted an unexpected net profit. There seems to be another reason for the exodus -- here's a look at whether it justifies the market's reaction to the news.

Roku's new player lineup, late 2017

Image source: Roku.

The platform's the thing

For both the fourth quarter and entirety of fiscal 2017, Roku showed notable improvement in most of its key fundamentals and operational metrics. In both periods, net revenue rose by just shy of 30% year-over-year to land at $188 million for the quarter and almost $513 million for the year.

On the bottom line, Roku delivered an adjusted net profit of $6.9 million ($0.06 per share) in the fourth quarter but widened its net loss to $63.5 million in 2017 from the year-previous result of $42.8 million.

Analysts were collectively expecting net revenue of just under $183 million, and a loss of $0.10 per share for the quarter.

Operational metrics were also looking good. At the end of the year, the company had 19.3 million active accounts, a 44% increase. Average revenue per user (ARPU) was 48% higher at $13.78.

In the two periods, Roku's growth was powered by its "platform" segment -- in other words, the software that allows users to do all that streaming (and happens to be the company's big hope for growth). Platform revenue shot upwards by over 150% for the year, in sharp contrast to player revenue's 2% dip. This is also why the bottom line improved so much -- platform, which doesn't involve hardware costs, is far more profitable.

Platform rose sharply because of a higher take from advertising, which has grown to encompass roughly three-quarters of total platform revenue. The company pointed specifically to the new-ish Roku Channel as a source of ad dollars, as it rapidly became the No. 3 ad-supported channel in the Roku ecosystem.

I'm particularly impressed by this, as I previously fretted that much of said ecosystem's usage consists of viewers tuning into the Netflix and YouTube channels. After all, Roku makes very little money from either.

Not taken into account

Yet it's that classic finance industry caveat that seems to apply here -- "past performance does not guarantee future results." Although most of those trailing numbers are pleasant, it seems investors were more focused on Roku's forward guidance. 

That wasn't as rosy. For fiscal year 2018, Roku expects it will post net revenue between $660 million and $690 million, with a headline net loss of $40 million to $55 million. On average, analysts had been expecting $661.5 million on the top line for the year with a bottom-line shortfall of only $35.9 million.

But that collective net loss estimate doesn't take into account a $10 million charge the company plans to book this year due to wonky changes in American accounting rules. Somewhat inconveniently, Roku didn't announce the charge until this earnings release. Factoring that simple difference into the calculation, the analyst projection for net loss would have come in at the lower end of the company's range.

So I think investors are overreacting to Roku's figures, specifically that guidance it proffered. We should keep in mind that the company is still fairly young and in the process of building its business, a process that'll probably result in losses. Meanwhile, those improvements in operational metrics and fundamentals are substantial.

I'm still not entirely sold on Roku stock. It's hardly the only hardware/software streaming play out there (on the content side, we can opt for Netflix, and for hardware, Chromecast maker -- and much more -- Alphabet). And while that "platform pivot" seems to be working, it's too early to determine how well it'll ultimately shake out.

Still, for the moment the company's stock looks oversold -- its punishment by the market was harsher than it deserved.

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