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Why Roku Gained Nearly 39% in April

By Anne Burdakin – May 4, 2020 at 10:01AM

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Advertising is expected to propel Roku higher after the coronavirus crisis passes.

What happened

In advance of its planned earnings release on May 7, Roku (ROKU -9.07%) provided investors with a sneak peek first-quarter update on April 14. Investors responded positively, sending Roku share prices higher. 

The company's stock price ultimately vaulted 38.6% in April, according to data provided by S&P Global Market Intelligence.

In a related press release, Roku said it expects ad revenue to pull back in the near term due to coronavirus crisis pressures on marketers' budgets, but long-term advertising revenue is forecast to be a major bright spot. When first-quarter earnings are released, Roku expects revenue to be slightly higher and other metrics generally in line with earlier guidance.
A person points a remote at a television.

Image source: Getty Images.

So what

Roku estimates that it finished March with 39.8 million active accounts, a net increase of almost 3 million accounts since the end of December. It also expects first-quarter streaming hours of 13.2 billion, 49% higher than a year earlier.

No wonder investors loved this preview. The growth of active accounts combined with even faster-growing hours streamed equals escalating advertising revenue long term. More people streaming Roku for longer periods of time makes it a very attractive place for advertisers to spend money.

Roku's advantage over other streaming services is that it provides access to both free and paid content, making it more likely that accounts it adds during the pandemic will remain active after the crisis. 

Now what

As the coronavirus crisis hit the U.S., most stocks dropped. Roku's share price dropped 53% before finally reversing course and recovering to a degree. As of now, the stock price is still down 15% for the year. 

There are a lot of unknowns that will affect valuation as the number of streaming services has grown. Competition for advertiser dollars is fierce. The estimates Roku presented in the sneak peek of the first quarter suggest it is headed in the right direction, and that it can deliver exactly what advertisers are looking for.

Roku is a great pick for long-term investors. Having said that, I think it would be best to start with a small position now, and add to it incrementally. The advertising market is huge and Roku is well positioned, but overall stock market conditions are still shaky and more time is needed to reveal the biggest winners in the streaming wars.

Anne Burdakin owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

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