Check out the latest Roku earnings call transcript.
Shares of Roku (ROKU 1.91%) recently surged, after the streaming device and service company provided a rosy update for its fourth quarter. Active accounts surpassed 27 million, representing 40% growth from a year earlier. Total streaming hours rose 68% to 7.3 billion for the quarter, and full-year streaming hours climbed 61% to 24 billion.
Roku CEO Anthony Wood attributed the robust growth to "consumers' growing enthusiasm for streaming," and the fact that Roku maintained its "leadership in streaming players, licensed smart TVs and TV streaming hours" -- despite growing competition from Amazon (AMZN -1.14%), Apple (AAPL -0.57%), and other rivals.
Image source: Getty Images.
Still, a day after Roku's update, short-seller Citron Research warned investors to "consider the risk" as the company faces fresh competition on multiple fronts. Citron previously shorted the stock from $50 to $35 before turning bullish, so its abrupt warning stole some of Roku's thunder.
Are the bulls or bears right about this divisive stock?
What the bulls will tell you...
Roku faces myriad competitors, but it still dominated the U.S. streaming device market with a 37% share as of early 2018, according to Parks Associates. Amazon ranked second with a 28% share, and Apple came in third with a 15% share.
Roku's device sales growth is decelerating. However, Roku's platform business -- which generates revenue mainly through advertising and content partnerships -- is growing quickly.
Bulls generally believe that the growth of the higher-margin platform business will offset the slower growth of Roku's lower-margin player business over the long term and buoy its bottom-line growth. Here's how those two businesses fared in the first three quarters of 2018.
|
Metric |
Q1 2018 |
Q2 2018 |
Q3 2018 |
|---|---|---|---|
|
Player revenue |
$61.5 million |
$66.5 million |
$73.3 million |
|
Player revenue growth (YOY) |
(3%) |
24% |
9% |
|
Platform revenue |
$75.1 million |
$90.3 million |
$100.1 million |
|
Platform revenue growth (YOY) |
106% |
96% |
74% |
Data source: Roku quarterly reports. Chart by author. YOY = year over year.
These growth rates look healthy, even for the device side of the business. Growth in active accounts and streaming hours also indicate that Roku's ecosystem is "stickier" than the bears believe:
|
Metric |
Q1 2018 |
Q2 2018 |
Q3 2018 |
|---|---|---|---|
|
Active accounts |
20.8 million |
22.0 million |
23.8 million |
|
Active accounts growth (YOY) |
47% |
46% |
43% |
|
Streaming hours |
5.1 billion |
5.5 billion |
6.2 billion |
|
Streaming hours growth (YOY) |
56% |
57% |
63% |
Data source: Roku quarterly reports. Chart by author. YOY = year over year.
Roku's forecast for 27 million active accounts and 7.3 billion streaming hours in the fourth quarter indicates that its growth isn't slowing down. Moreover, Roku's average revenue per user (ARPU) has steadily risen over the past year:
|
Metric |
Q1 2018 |
Q2 2018 |
Q3 2018 |
|---|---|---|---|
|
ARPU (trailing 12 months) |
$15.07 |
$16.60 |
$17.34 |
|
ARPU growth (YOY) |
50% |
48% |
37% |
Data source: Roku quarterly reports. Chart by author. YOY = year over year.
All of these metrics indicate that Roku's revenue growth should keep rising as it locks users into its ecosystem with fresh partnerships -- like its ESPN+ partnership with Disney, the introduction of the Roku Channel on select Samsung smart TVs, and new premium channels for pay-TV networks.
Analysts estimate that Roku's revenue rose 42% in 2018 and will increase 35% this year. Those are solid growth rates for a stock that trades at roughly six times this year's sales.
Image source: Getty Images.
What the bears will tell you...
Roku's top-line growth looks solid, but the gross margins of its player and platform businesses remain inconsistent.
|
Business Line |
Q1 2018 Gross Margin |
Q2 2018 Gross Margin |
Q3 2018 Gross Margin |
|---|---|---|---|
|
Player |
15.8% |
22.2% |
11.5% |
|
Platform |
71.1% |
69.8% |
70.5% |
|
Total |
46.2% |
49.6% |
45.6% |
Data source: Roku quarterly reports. Chart by author.
During last quarter's conference call, Roku CFO Steve Louden warned that holiday promotions for players and a shift toward video ads would cause sequential gross margin declines for both the player and platform businesses in the fourth quarter.
This warning indicates that Roku's operating loss -- which widened from $7.9 million in the third quarter of 2017 to $11.7 million in the third quarter of 2018 -- won't narrow anytime soon. That's why Wall Street expects Roku's bottom line to stay in the red for both 2018 and 2019.
Roku's quarterly losses are also causing the company to burn cash. Negative free cash flow could cripple Roku's ability to fend off aggressive moves from bigger rivals -- like Amazon's partnership with Best Buy to sell Alexa-powered "Fire TVs" in the latter's stores and Apple's decision to launch iTunes on Samsung TVs.
My take: Stay on the sidelines
Roku is holding up remarkably well against the competition, but I'm concerned that much of its fourth-quarter growth was fueled by heavy holiday promotions. Maybe I'll be proven wrong by Roku's fourth-quarter report in February, but I simply don't see enough compelling reasons to buy this stock when other more promising growth plays are still on sale.
