Roku Lost a (Profits) Battle, but Is Winning the (Living Room) War

On Thursday, Roku (ROKU 1.58%) reported a much smaller-than-expected loss for the second quarter, and across the board, it's clear that this streaming platform and hardware company is continuing to make major headway in the battle for the living room. Its average revenue per user rose significantly, as did its active user base, and revenue of $250 million for the quarter beat expectations.

In this segment from MarketFoolery, host Mac Greer and senior analyst Jim Mueller talk about what's going on with the largest provider of devices for streaming, its competitive moat, the stock's rich and rising valuation, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on Aug. 8, 2019.

Mac Greer: Let's begin with the video-streaming platformer, Roku. Shares up more than 20% today on I think what we can call, Jim, a better-than-expected quarterly loss. This company is still losing money. But revenues up 59% year over year, growing faster than expected. Roku now has 30.5 million active users for the quarter. That's up 39% from the same period last year. Jim Mueller, what do you make of Roku?

Jim Mueller: They're doing pretty well, actually. Two hundred and fifty million dollars in revenue, as you mentioned. That's ahead of analysts' $240 million estimate. They lost $0.08 per share. Analysts were estimating around $0.18-per-share loss. So that was pretty good. Their ARPU, average revenue per user, is up a whopping 27% year over year to over $21 per user on average. That's from people buying movies and content to watch through the Roku platform.

Greer: Jim, we talk a lot about the battle for the living room. There are all these different players. Depending on how you slice it, when you look at Roku, what's their secret sauce? What's their moat for the next one, two, five years?

Mueller: I think their moat going forward is the fact that they are the largest provider of devices for streaming. Strategy Analytics estimated about 41 million streaming platform devices out in the market in the U.S. right now. That's 36% higher than the No. 2, the Sony PlayStation, and much, much higher than the one I have, Google Chromecast, and the older version of the Apple TV. Kind of behind the times, I guess.

Greer: They have a huge installed base.

Mueller: Right, and that's only projected to go higher. They have thousands and thousands of channels, you can go through their channel store and add onto your devices, different apps. They have also the Roku channel. They have a home screen. They have better analytics on what you might want to watch next on their Roku channel, and be able to serve up new ideas to you. They get a fair amount of revenue from advertising through their Roku channel and the home screen. Knowing their users and knowing what people like to watch allows advertisers to do a better job at targeting, so advertisers are happier.

Apple is coming out with its new device, but it's going to be a walled garden. They're only really offering stuff that you have to subscribe to through that Apple device. For instance, Netflix is not on it at all. But if it were, you wouldn't be able to use your Netflix account outside, you'd have to buy it inside the Apple device. That may or may not work out for Apple. Google Chromecast is out there. The Amazon Fire Stick is out there. But those are the ones from the really big players.

As I said, I'm not sure what Apple is going to bring to the table. They're really insistent on revenue sharing for those subscriptions, which is why Netflix turned them down. But Roku, just from the sheer number, they're way ahead of anyone else there.

Greer: What about the stock? The stock has been on fire. When you look at the valuation -- now, the company's still losing money. Not near as much as they were expected to lose. That's the good news. But the valuation, pretty rich.

Mueller: Well, for a company losing money, certainly! And not generating a ton of cash flow, either. But one reason the stock is on fire, and as we were talking about before we taped, the stock was up 230% year to date before today. That's incredible. But part of the reason is because they've been steadily beating estimates, both top and bottom line, at least for the last six quarters. But on the other hand, they've only made a profit three of the seven quarters they've been public. And, they're not generating very much cash flow. Since they went public in September 2017, for instance, they've only managed to generate about $34 million in operating cash flow, $25 million of which was just this quarter alone. So, they've been burning money. They raised some more cash through a secondary offering recently. But I'd like to see them become cash flow positive on a consistent basis, and then hopefully net income positive on a consistent basis. Then it'd be easier to value them.