The pandemic is causing people to shift their entertainment habits. The list of activities people can safely engage in for entertainment has dwindled from multitudinous to mostly those that can be done at home. Streaming content providers are benefiting from limited options and Roku (ROKU 2.69%) is one of the prime beneficiaries of that trend. Even after recent declines as part of the stock market sell-off at the end of October, the stock is up over 60% year to date.
The company might report another quarter of fantastic results when it releases its quarterly financial statements on Nov. 5. Investors will be looking to see if the company is continuing to thrive as people stream more content. The answer may not be as straightforward as it may appear.
Accounts and ads matter
There can be no doubt that people are streaming an increasing amount of content. That trend started before the coronavirus pandemic and was exacerbated as people had limited options for entertainment. Roku has benefited substantially from that shift. In its most recently reported quarter, the company reported revenue of $356 million, which was a 42% increase from the year prior. Fueling the increase was the surge of new accounts. The company reported 43 million active accounts in the second quarter, up from 39.8 million accounts in the previous quarter. Moreover, the time spent consuming content via its platform increased 18% from Q1 to Q2.
Given the ongoing push for social distancing, it's likely that when the company reports earnings on Nov. 5, it will reveal high levels of consumer engagement, albeit the rate of increase may not be accelerating as businesses slowly started reopening during the quarter. Still, businesses are reopening at a slow pace, and many entertainment venues are still closed or operating at reduced capacity. That should keep user engagement with Roku devices elevated for the time being.
Additionally, with an uncertain economic environment, it's unknown how advertisers adjusted their spending. If social media company Pinterest is any guide as to advertising sentiment, then Roku should do well. Pinterest, which also relies on advertising revenue, reported fantastic results that exceeded expectations late in October. Additionally, Facebook, and Alphabet, two more companies that rely on advertising for revenue, reported quarterly results at the end of October that reinforced the fact that advertising spend is rebounding.
Roku generates about two-thirds of its revenue from advertising and that revenue provides most of its profit. Less than 6% of total gross profit comes from the sale of its players. Rather, it counts on marketers paying it to show ads to people watching through Roku-enabled devices.
What it could mean for investors
Analysts on Wall Street expect the company to return to revenue growth this quarter. The average revenue estimate is for $366 million, an increase of 40% over the previous year. Earnings per share expectations are for a loss of $0.40, which is almost double the loss of $0.22 a year ago.
The commentary management delivers on the conference call will be crucial. If the company reports quality results in the current quarter but hints at trends going in the opposite direction as COVID-19 cases started to surge, this tech stock's price could fall. If that does happen, it could be a buying opportunity for long term investors, as millions of people are still cutting the cord on cable and switching to streaming content. Roku has set itself up to be a winner in that shift.