Roku (NASDAQ:ROKU) reported fantastic third-quarter results that suggest it's benefiting from more people who prefer streaming their content over traditional cable viewing. This trend is accelerating during the pandemic and is something the company does not expect will reverse once the COVID-19 pandemic has faded.
That, along with other interesting developments that potential investors are going to want to know about, were revealed when the company reported its third-quarter results on Nov. 5. Let's take a closer look at three important details that investors should take away from Roku's latest earnings release.
The shift to streaming is just getting started
The first thing investors should take away is the strong 73% year-over-year revenue growth the company reported to reach $452 million overall for the quarter. Wall Street analysts were expecting Roku to report revenue of $366 million. Impressively, it was able to achieve this growth while also expanding profit margins. The company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased to 12.4%, up from a negative 0.2% in the prior year. This resulted in the company reporting a surprising positive net income of $12.9 million.
Second, those interested in the stock should consider the total active account growth, which increased by 2.9 million from the previous quarter to 46 million. Moreover, if you consider it year over year, active accounts grew by 43%. The more people who establish a Roku account, the more demand will come from advertisers to reach those individuals.
Finally, shareholders should be interested in the average revenue per user, which grew by 20% year over year to reach $27 in the quarter. Importantly, as well as things are going for Roku, it still has a long growth runway ahead of it. In speaking about the shift from linear ad spending to streaming, CEO Anthony Wood had this to say in the letter to shareholders:
...the most interesting thing is that even though we have a nice robust ad business, the vast majority of advertising spend is still in linear television, it's not -- it's still not in streaming. And one of the interesting things in the quarter was the fact that advertisers are increasingly seeing streaming is something they need to start allocating a bigger portion of their budgets toward.
Looking ahead to the holiday quarter, Roku management is forecasting revenue to grow by about 40% year over year, and that its more profitable platform segment will account for two-thirds of overall revenue. That's barring any significant disruptions to the overall macroeconomy, which is no certainty. Coronavirus cases are surging in the U.S. to record levels, and that has the potential to cause local business shutdowns or harm consumer shopping behavior, which would, in turn, reduce marketers' willingness to spend.
Longer-term, Roku is still growing internationally, as evidenced by Roku unit player sales doubling in some international markets. Currently, most of Roku's revenue is generated in the U.S., so the international market is a relatively untapped area for the company. Overall, the major tailwinds of consumers switching to streaming from linear and ad budgets following suit, combined with the international growth opportunity, make Roku a consumer discretionary stock that should be on investors list of stocks to watch.