Is Roku Proving Its Multipronged Strategy Can Compete?

In this segment from MarketFoolery, host Mac Greer and senior analysts Andy Cross and Ron Gross discuss Roku (ROKU 1.58%), a tech company best known for its set-top streaming devices. Management recognized a while back that hardware was not going to be enough, so it's been transitioning to a more platform-centric model -- and it's working. Platform revenue was the larger segment for the second quarter in a row, increasing 96% year over year. And The Roku Channel is making headway independently.

The trio talk about Roku's advantages in the crowded streaming-video space, and what investors should be watching for from here.

A full transcript follows the video.

This video was recorded on Aug. 9, 2018.

Mac Greer: Let's begin with Roku. Shares up more than 20% at the time of this taping. Roku reporting a surprise profit -- a modest profit. We should be clear about this.

Ron Gross: $0.00 per share, but who's counting?

Greer: [laughs] Are you rounding?

Gross: Yeah, I'm rounding. It's not exactly $0.00. They made a little bit of money.

Greer: A little bit of money. Ron, Roku makes streaming players that connect to your TV. They also make TVs that have the streaming experience built in. But, they're not just a hardware business these days, huh?

Gross: They're not. The platform business, which has always been the business that they intended to really go after in a big way, because it has what they say are the fattest margins and the largest gains for the future, has really been ramping up. In fact, platform revenue eclipsed hardware sales for the second consecutive quarter, now 58% of total revenue. Platform revenue is derived from advertising on the platform and subscription revenue share. Let's say you, through your Roku platform, subscribe to Hulu. They get a little piece of that pie there in the revenue-share agreement. That has really been ramping. Platform revenue up 96% this quarter, with advertising revenue representing the largest driver of that. I think they have high hopes for advertising revenue continuing to ramp going forward.

It allowed the company to raise its sales and profitability guidance, which is strong. You see that reflected in the strength of the stock. In general, total revenue up 57%. The company continues to execute. Active accounts up 46%. The company hasn't been public very long. If you recall, they went public back in September at $14 a share. Here we sit at $56.

Greer: Andy Cross, you are one of those accounts.

Andy Cross: Yeah. It was a pretty good quarter. You guys laughed a little bit at the profits side of the equation, but right now, profits isn't really the big initiative. Anthony Wood, who co-founded the company and owns more than a billion dollars' worth of stock, super excited about what's happening with the platform business they're growing. Revenue more than doubled in that business. Revenue in total was up 57%, as Ron mentioned. Revenue doubling in profits, doubling on the platform side.

And now, they're taking it directly to the web. You actually will not need the Roku Stick or Roku system to watch it, you can watch it right online. The Roku Channel is almost a top 10 streaming channel on the Roku platform right now. There's a lot of excitement about the programming that they're going to do with their partnerships, these strategic initiatives with their ad clients into that channel. They can control a lot of it. To me, it sounds like they're trying to out-Netflix Netflix a little bit here or do a very similar job to what Netflix does online.

Greer: I hear you there, Andy, but there are so many players. You just mentioned Netflix. There are so many players in this space.

Gross: And big boys.

Greer: These little companies called Apple and Alphabet, exactly. For Roku, what is Roku's special sauce?

Cross: They have a leading position when it comes to TVs. Take a Samsung TV or whatever it might be, it's something like 25% of all TVs have Roku embedded into it --

Gross: Not Samsung, actually. Samsung has its own.

Cross: OK, a different manufacturer. They have a leading position there. As Ron mentioned, they have the subscription partnerships with the other players in there. They have a little bit of initiatives and momentum building on that. They're clearly trying to create their own platform business and channel with the Roku Channel, which is having some pretty nice success.

That's a direction that the company is moving that moves them into that space. It takes the Roku name and puts it on their own channel, with hopes of growing that business that's outside of just the player, outside of the Roku platform. Ultimately, there are a lot of ad dollars out there that they're trying to go after. Having those three relatively tied-in businesses, but also unique, hopefully helps them distribute their revenue platform outside of just the two core platforms of the player and the platform.

Greer: As we wrap up Roku here, they went public in September of 2017. They're not quite a year old as a public company. The stock has doubled. They have a market cap close to $6 billion, around $5.7 billion. What should investors be watching going forward? What's your big question for Roku?

Gross: It's actually more than doubled. $14 to $56. It's been a really impressive run. You have to keep watching, that platform business keeps growing. Again, that's where the fatter margins lie. You have to see their active accounts continue to move up, their average revenue per user, -- ARPU, if you will --

Greer: I will not.

Gross: You must, in this case. You want to see that keep moving up nicely. And it will be interesting to see if the new web Roku Channel gains traction. I think it will.

Cross: By the way, revenue per user grew $1 quarter over quarter, from $15 up to $16.60. Clearly, they have some momentum building, and we're seeing it in the stock price today.