Roku (ROKU -1.73%) released its third quarter-earnings report on Nov. 6, and the ensuing reaction by the market was a bit of a head-scratcher. The company's performance was positive by almost all accounts: Roku's active accounts increased by 36% year over year, while its streaming hours and average revenue per users grew by 68% and 32%, respectively. Further, the company's revenue soared by 50% year over year and came out a bit ahead of analyst estimates, on the strength of 79% year-over-year growth in its platform segment.
However, growth stocks are known to behave erratically, and despite these results, Roku's stock dropped by as much as 20% after its earnings release. Perhaps the sell-off was due to fourth-quarter guidance which didn't live up to expectations, or its shrinking margins. Still, investors can look forward to the company's future, as its recent acquisition of Dataxu -- a provider of demand-side marketing ad tools -- may pay rich dividends down the road, not to mention the fact that the launch of several high-profile streaming platforms may prove beneficial to Roku as well. Arguably the biggest casualty of Roku's success continues to be cable TV.
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The cord-cutting continues
The way we watch television is changing. Consumers are increasingly more interested in streaming platforms such as Netflix and Hulu -- as well as other content accessible from the internet -- than they are in cable. Roku offers its customers the convenience of having multiple viewing options available at their fingertips. As a result, many choose to forego spending hundreds of dollars each year to pay for a typical cable TV subscription they'd barely use anyway.
The so-called cord-cutting phenomenon has been well documented, and it's still alive and well. In its third-quarter letter to shareholders, Roku observed the following:
According to eMarketer, around 56 million households in total will have canceled cable or satellite TV subscriptions by 2023. Approximately 1.7 million consumers cut the cord in Q3 alone. Our own research indicates that roughly 50% of U.S. cord cutters are Roku customers, and cord cutters who choose Roku products are highly satisfied with the decision and extremely unlikely to consider returning to a traditional pay TV subscription.
Interestingly enough, Netflix made a similar observation in its most recent letter to shareholders. According to the streaming giant, the growing number of streaming platforms will negatively affect cable TV in that it will "accelerate the shift from linear TV to on-demand consumption of entertainment."
Cable TV is still alive...for now
Roku and Amazon are the undisputed leaders of the streaming media player market, with the former currently occupying the top spot. Both are poised to continue to benefit from the ongoing switch from cable TV.
Thus, although cable isn't completely dead yet, investors should factor the effect of the ongoing cord-cutting trend on Roku's business -- for now, it's proving an extremely positive part of Roku's growth story.
