Please ensure Javascript is enabled for purposes of website accessibility

The Blockbuster Announcement Hidden Away in Roku's Earnings Release -- and Why It's a Big Deal

By Danny Vena - Aug 11, 2019 at 5:20PM

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

Investors may have missed this brief revelation that could have big implications for Roku's future.

After a run that saw its stock gain 234% so far in 2019, investors had expectations going into Roku's (ROKU 4.42%) second-quarter financial report. Shareholders got all they hoped for and more when the streaming pioneer reported better-than-expected results that pushed the stock up more than 20% on the day following the earnings release.

Roku generated revenue of $250.1 million, up 59% year over year, resulting in a net loss per share of $0.08. Both numbers were far better than analysts' consensus estimates, which were calling for revenue of $224.2 million and a loss per share of $0.22.

As tantalizing as the results were, there was a short entry tucked away in Roku's shareholder letter that wasn't widely reported, and it could have big implications for the company's future success.

The Roku Channel showing on a connected TV with available premium subscriptions like Showtime and Starz.

Image source: Roku.

Just two lines

While most investors were rightly focused on Roku's top- and bottom-line results, the company slipped a short missive into its shareholder letter than many may have missed:

We recently agreed with Walmart (WMT 2.13%) to offer several new Roku devices including audio products to their customers under their Onn brand. This is in addition to Roku TVs and Roku players already sold through Walmart.

This seemingly innocuous announcement would have a big impact on Roku's future success, but not for the reason you might think.

A little background

While many manufacturers took the easy path, using a modified mobile operating system (OS) to power their connected TVs, the Roku OS was built from the ground up, specifically designed for the task. As a result, the company has a growing list of manufacturers that license the system to include it in their connected TVs, rather than spending precious resources to develop their own. This partner list includes TCL, Sharp, Philips, RCA, JVC, Hitachi, and more.  As a result of these deals, Roku's OS can now be found in more than one in three connected TVs sold in the United States.

While investors might associate Roku with its streaming players, dongles, and connected TVs, they shouldn't make the mistake of thinking that's how the company makes money. Since early 2018, Roku has made the lion's share of its revenue from its platform segment, which mostly consists of advertising. While the company makes very little from its player segment, it's still an important part of Roku's overall strategy.

A path into the living room

Roku made the decision several years ago to forgo much of the profit from the player segment to focus on account growth and advertising revenue. By getting its players and connected TVs in front of as many consumers as possible, it increases the number of active accounts and ultimately the number of people that see the advertising it serves up. This also increases the amount of data Roku derives from its viewing audience, which helps make its ads more effective.

This move has proven hugely successful. Roku's platform revenue now comprises 67% of the company's total revenue and grew 86% year over year in its most recent quarter. At the same time, active accounts grew to 30.5 million, up 39% from the prior-year quarter, while streaming hours of 9.4 billion grew by 72%.

A Roku TV showing viewing options.

Image source: Roku.

Here's why it matters

With Walmart's scale and incredible reach within the low-cost segment of the market, this is truly a match made in heaven. Lower income consumers will be more likely to purchase an inexpensive connected TV -- like Walmart's Onn brand -- and they're also more likely to watch ad-supported services like The Roku Channel.

This partnership will help Roku's growing penetration. With 30.5 million active accounts and a population of about 128 million households in the U.S., the company can now reach about one of every four U.S. consumers, and that number will only continue to grow with each passing quarter. 

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

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$126.00 (2.13%) $2.63
Roku Stock Quote
Roku
ROKU
$88.54 (4.42%) $3.75

*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 service.

Stock Advisor Returns
332%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

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.