Please ensure Javascript is enabled for purposes of website accessibility

3 Things Roku Stock Needs to Get Right This Week

By Rick Munarriz – Nov 6, 2018 at 2:27PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The streaming media device maker reports its third-quarter results after Wednesday's market close. There's a lot riding on the numbers.

The bulls are bored when it comes to Roku (ROKU 1.22%). The stock has surrendered 27% of its value since its late early October peak. The bears are also twiddling their thumbs. Less than 7.1 million shares of the streaming video pioneer were sold short as of mid-October, the stock's lowest short interest since April. 

It's still safe to say that this week won't be boring. Roku reports its third-quarter results after Wednesday's close, and if there's anything that can wake up the bulls or bears -- or both -- it's a financial update. Let's go over a few of the things Roku needs to make sure it gets right if it wants to revisit last month's highs.

Roku TV operating system on a TCL smart television.

Image source: Roku.

1. Keep the accelerating revenue growth coming

A big reason for Roku's success -- the stock has roughly quadrupled since going public at $14 last year -- is that the company itself is growing a lot faster than it was at the time of its IPO. Revenue that rose at a 25% clip in 2016, picking up slightly for a 29% gain last year, has surged 36% in the first quarter and a hearty 57% in its blowout second quarter.

Roku's growth is the result of faster-growing platform revenue overtaking slow-growing hardware sales to be the key driver. Analysts see revenue growth reverting back to the first quarter's 36% pace when it reports on Wednesday afternoon, but that still finds Roku on pace to accelerate top-line growth for all of 2018.

2. Usage trends need to keep improving

Platform revenue is everything at Roku these days, and the growth isn't just about how many more active users are streaming through Roku's operating system than there were a year earlier. The time they spend on the platform and the average revenuer per user being generated by Roku are on the rise. They stack on top of one another for a tasty totem pole of super growth. 

We saw this play out last time. With 22 million active users on the platform, Roku's audience had grown 48% since the end of last year's second quarter. However, the actual consumption on the platform has risen 57% over the past year. Average revenue per user is up 48%, which, stacked on top of the similar 48% audience growth, is why platform revenue nearly doubled in the second quarter. 

The usage trends should decelerate, but as long as platform usage per user and revenue per user are on the rise, Roku's model will be just fine. 

3. Roku needs to prove it can win

A lot of tech darlings buckled last month, but things got particularly rough for Roku in terms of the competitive climate. Reports of tech giants putting out free or nearly free streaming services to push their own hardware devices nipped Roku days after it hit all-time highs last month. Things got so bad for the stock that Wedbush analyst Michael Pachter went from initiating coverage with a neutral rating in early October to upgrading the stock last week while lowering his price target. Everything is relative on Wall Street. 

Roku's strong growth can help, and healthy guidance can be reassuring. It also wouldn't hurt if it was able to convey why it feels that its platform will continue to thrive no matter what anyone else may roll out. It's time to prove. It's time to move. 

Rick Munarriz owns shares of Roku, Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$58.89 (1.22%) $0.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.