Judging by Roku (NASDAQ:ROKU) stock's price action since the streaming platform company released its second-quarter earnings report earlier this month, you would think Roku is facing major challenges during the pandemic. Shares are down 11% since the quarterly update was posted. But investors should arguably be impressed by Roku's quarterly results, which demonstrated strong growth during a period when marketer ad budgets contracted significantly.
Highlighting its impressive momentum during Q2, Roku's second-quarter revenue soared 42% year over year. Further, both the company's top and bottom lines for the period were significantly higher than analysts were anticipating. Yet management's warning that ad spend on its platform wasn't likely to fully recover to pre-pandemic levels until well into next year seemed to overshadow this strong performance.
A closer look at Roku's second-quarter results shows that there's plenty for shareholders of this growth stock to be excited about -- even during these uncertain times.
Roku's ad business is still growing rapidly
"[T]he outlook for the ad industry remains highly uncertain for the balance of this year, and we believe it will be well into 2021 before TV ad investment recovers to pre-pandemic levels," said Roku founder and CEO Anthony Wood in his opening remarks during the company's second-quarter earnings call. Taken by itself, this might seem a bit ominous.
But what investors need to keep in mind is that the company's ad business is still performing well -- just not as well as it was before the coronavirus hit. Indeed, Wood said during the call that "the strong relative performance of our ad business ... stood out during the quarter," referring to its robust growth during a challenging time for advertising overall.
Highlighting the company's impressive momentum in its ad business, the company said ad impressions monetized on Roku were up 50% year over year. Of course, this is a deceleration from growth that exceeded 100% before the pandemic started. But it's still strong.
Q3 momentum looks promising
While Roku management didn't provide any specific guidance, it looks like things are trending in the right direction as the economy reopens.
After announcing 41% year-over-year growth in active accounts in Q2, Roku Chief Financial Officer Steve Louden notably said, "Strong active account growth has continued into early Q3." Later during the call, Louden said more broadly that the company currently has "a lot of positive trends" working in its favor. The company's decision to not provide guidance had more to do with having less visibility than usual for the second half of the year due to these unprecedented times than it had to do with current business trends, Louden explained.
This key catalyst is just getting started
Finally, investors should note that management's bullish long-term view for the ongoing shift of advertiser budgets from traditional television to over-the-top (OTT) TV did not change. If anything, Roku is now even more bullish on the opportunity for OTT advertising.
"All advertising is going to switch to OTT for video, and we're just still in the very early days," said Wood.
In addition, Wood said that the company is "seeing that the ongoing COVID-19 pandemic is accelerating the macro trends that will define the streaming decade," including brands "reevaluating where their ads need to appear in order to reach consumers." In other words, the pandemic has accelerated consumer adoption of streaming TV, making the advertising channel more essential than ever.