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Roku Will Prioritize Growth Over Profits

By Stephen Lovely - Mar 12, 2020 at 7:00AM

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The company is being conservative with its earnings projections

The latest earnings report from Roku (ROKU 4.02%) featured plenty of good news, including year-over-year growth of 50% and better-than-expected earnings and revenue per share. So why did Roku's stock slide after the release of the report?

What's making some investors uneasy about Roku is its profitability. Net losses increased this quarter, and its earnings guidance makes it clear that Roku will not prioritize near-term profits over long-term growth. It will continue to spend to further its growth goals, and that spending will cut into profits.

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Roku's very good year

Whatever tech investors might think of Roku's future, the company's past year has certainly been impressive. Since late 2018, its growth and its stock price have soared. Eager investors pushed Roku's stock up 370% between the start of 2019 and early February 2020.

Why have investors been such big fans of Roku? One reason is that it has been savvy enough to focus on advertising. With competitors in its streaming-device market, Roku opted to forgo profits on its hardware and making big bucks though its advertising platform. Roku's fully owned ad-supported video on demand (AVOD), The Roku Channel, gave the company even more advertising revenue when it debuted in 2017. It has found reliable ways to monetize its streaming platform, which is the most dominant in the business.

Roku's spending and profits

Roku growth investments may depress profitability even as the company faces other issues, such as the looming threat of Amazon.com -- long a competitor in the streaming device and platform spaces, and soon to be a larger player in the advertising markets that Roku so relies upon. Amazon is reportedly in talks to bring its advertising platform beyond Fire TV and to other platforms. 

Roku's latest earnings report and earnings call were largely cheerful undertakings, and its most recent quarter had the sort of numbers that tend to keep executives chipper. But a rosy outlook may have been priced into the stock at the time of Roku's quarterly report (something that's less true now, following a marketwide decline), and investors are starting to wonder where the profits are. As Roku execs manage expectations regarding Roku's immediate future, some analysts are crying foul.

Wedbush's Michael Pachter, for one, isn't sure why Roku can't grow and profit at the same time. "While we agree that the company must invest to support its next leg of growth, we fail to see how it cannot at least reach modest profitability with revenue at or above $1.5 billion," he wrote of Roku's quarterly report.

Is Roku heading in the right direction?

Roku's desire to spend on expansion makes sense on its face. But stocks do not respond to long-term strategies alone. Roku's stock still trading at 4.8 times its revenue as of this writing, and its impressive rise this past year had a lot to do with Roku's dominant position and its relatively low levels of competition.

Preserving its leadership as competitors make moves will require spending, but Roku has a lot of investors eager to see the profits start rolling in. Enthusiasm for the stock is dampening, but Roku remains focused on the long term.

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