Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Roku Grows Active Accounts by 36%; Losses More Than Double

By David Butler - Nov 7, 2019 at 9:05AM

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

Roku continues to show strong demand for its services, but the stock can't handle the losses.

Roku ( ROKU -2.24% ) reported mixed third-quarter results that included large gains in active accounts but also a big increase in net losses. Investors responded by pushing the stock down more than 10% in after-hours trading.

Roku is a difficult company to gauge. The potential to be an intermediary between major streaming platforms and consumers is awesome. But its financial performance so far is not. Losses of $0.22 per share weren't what investors wanted to see after the stock ran up more than 300% this year.

How Roku did in the third quarter

  • Total revenue grew 50% year over year to $260.9 million.
  • Active accounts increased 36%.
  • Total streaming hours jumped 68%.
  • Average revenue per user increased 30% to $17.34.
  • Gross profit rose 50% to $118.5 million.
  • Gross margin took a small hit, easing lower from 45.6% last year to 45.4%.
  • Overall net losses from operations were $26.5 million. That's a 126% increase from Q3 2018.
  • Adjusted EBITDA fell from $2 million in Q3 2018 to a $0.4 million loss in Q3 2019.
  • Net losses came out to $0.22 per share.

Things continue to look solid in terms of growing the business. The company's devices are perfectly situated to serve as a middleman between consumers and various content providers within the rising streaming industry. Roku's big problem is one that resonates with quite a bit of the tech industry: The stock has run far beyond what the company offers in terms of earnings. Unless you're a speculative trader, it makes names like these tricky to invest in. You get big swings, and when a company reports big increases in losses, it can cause drops like this because the value isn't there to back it up.

Remote with streaming service in background

Image source: Getty Images.

Guidance

Looking ahead, Roku anticipates finishing the year with net losses of $66 million to $61 million. That would mark the largest annual loss in the past five years. Full-year revenue, meanwhile, is expected to come in at around $1.1 billion, for a 34.7% increase from 2018. That guidance continues the trend Roku has shown for years. It's growing its business at exceptional rates. It's just not making any money in the process.

This trend, along with the price of the shares, forces investors to make a tough decision of whether to pay huge premiums for the stock while they wait for those future potential earnings to be realized.

Overall, I think the company will be fine. A lot was expected this quarter. But the balance sheet carries more than $385 million in cash, and that buffer makes the quarterly losses more than manageable. The stock, on the other hand, could have some bearish potential. A pullback was bound to happen when you consider the valuation of the stock relative to the lack of earnings. Looking ahead, we see the user growth is strong and revenue gains are robust. Roku simply has to start showing investors something on the earnings side. Whether it's wise to pay a premium valuation for a company that's likely to lose more than $60 million this year is a different story. 

I think a wise investor has to be neutral here. A lot of future potential already seems baked into this one. My bet is that Roku shares will have a hard time finding renewed momentum this year. It's a situation where the company has to create future gains that will justify its current share price, rather than having a share price that can react positively to future gains.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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
$205.55 (-2.24%) $-4.71

*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 service.

Stock Advisor Returns
624%
 
S&P 500 Returns
141%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

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

Our Most Popular Articles

Premium Investing Services

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