Please ensure Javascript is enabled for purposes of website accessibility

5 Important Takeaways From Roku's First-Quarter Update

By Adam Levy – Apr 15, 2020 at 11:02AM

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's Q1 results were better than expected, but the near future is murky.

Roku (ROKU -8.98%) released an update for investors this week, providing an early look at its first-quarter results and withdrawing the company's guidance for the full year. Roku was undoubtedly one of the beneficiaries of the new stay-at-home economy as the world works to stop the spread of the coronavirus pandemic, and that showed up in some of the company's first-quarter estimates. Investors cheered the results, sending the share price higher.

Here are the five most important takeaways from Roku's update.

A Roku remote on a table next to a bowl of popcorn.

Image source: Roku.

1. 39.8 million accounts

Roku added nearly 3 million net new accounts in the first quarter, bringing its total to 39.8 million. Roku is likely closing the gap Amazon (AMZN -3.38%) opened up in late 2018 and early 2019. Amazon last reported 40 million Fire TV users at the start of the year.

Importantly, Roku's absolute growth is improving while Amazon's growth is slowing. Roku's 3 million net additions for the first quarter of 2020 compares well to the 2 million net additions it saw in Q1 2019.

What's more, Roku will likely have another strong period of net additions in the second quarter. Management noted an acceleration in new account growth beginning in March. With most of the world staying at home for the entire month of April and probably further into the second quarter, Roku should see more people buying its streaming devices and smart TVs. That could prop up user growth in what's typically a weak quarter for Roku.

2. 13.2 billion hours streamed

Roku users streamed 13.2 billion hours in the first quarter. Some simple back-of-the-envelope math shows a significant jump in average engagement without even accounting for the fact that Roku's net additions were likely heavily weighted toward the end of the quarter. That suggests that engagement was already trending upwards before the impact of coronavirus, and it should move even higher in the second quarter.

That's a great sign for Roku, which generates a growing majority of its revenue from its platform business. Indeed, platform revenue growth will likely outpace the 49% year-over-year increase in streaming hours. 

3. $307 million to $317 million in revenue

Roku's revenue estimate came in above expectations, likely as a result of strong engagement. Analysts had been expecting around $300 million in revenue for the quarter.

Roku's revenue outperformance was likely supported by an increasing preference for ad-supported streaming among consumers. Roku controls a percentage of each ad-supported service's ad inventory on its platform, and it operates The Roku Channel as well.

Meanwhile, the company's integration with DataXu and innovation in new ad products ought to improve ad values, driving average cost per impression higher. So, as engagement with ad-supported services increases, Roku's also generating more revenue per hour streamed.

4. Gross profit is falling

The midpoint of Roku's estimates puts its gross margin at 45.4%. That's a considerable drop from the company's 48.8% gross margin in Q1 of last year.

Roku's gross margin pressure likely comes from two factors. First, management said it's planning to operate the Player segment at zero gross margin going forward in order to maximize account growth. That seems to have worked well.

The second factor is the revenue sources for the platform business are shifting to more video advertising, which carries a lower gross margin than display ads and revenue sharing, as well as the new wholesale business in The Roku Channel. Roku started wholesaling premium subscriptions in The Roku Channel last year, and the margins are significantly lower on those sales. In March, Roku started partnering with media companies and offering extended free trials for several services, which may have cut into its gross margin as well.

The falling gross margin is actually a sign that things are going according to plan.

5. An uncertain advertising market ahead

Roku isn't immune to the impact of the coronavirus pandemic on the economy. With advertising as its main source of revenue, the downturn in ad spending will certainly curb its growth in the second quarter. "We expect some marketers to pause or reduce ad investments in the near term," CEO Anthony Wood said in the press release.

Indeed, even if Roku sees a bump in active accounts and streaming hours in the second quarter, it's unlikely to experience the same results it saw in Q1. Average ad prices are dropping across the board for digital advertising companies, and Roku's certainly not immune.

That said, if Roku can take the opportunity to win over advertisers while they scramble to find new ways to reach audiences without major television events like sports, it can come out of the situation much stronger than when it came into it.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Roku and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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
$55.62 (-8.98%) $-5.49, Inc. Stock Quote, Inc.
$114.02 (-3.38%) $-3.99

*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 analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

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.