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Roku Insiders Are Selling -- But Investors Shouldn't Worry

By Trevor Jennewine - Updated Dec 30, 2020 at 7:16PM

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The routine sales don't seem to indicate trouble at this thriving company.

Roku's ( ROKU 2.85% ) streaming platform connects users to subscription services like Disney+ and Netflix, and free content like The Roku Channel, making it easy for viewers to watch their favorite TV shows and movies. So far this year, Roku's stock has been on fire, with shares up more than 140% -- and amid that run-up, several Roku insiders, including CEO Anthony Wood, have recently sold a significant number of shares. But a closer look at the sales suggests that investors have no need to panic.

Insider ownership

Roku has two different types of common stock: Class A and Class B. The only difference is that Class A shareholders get one vote per share, and Class B shareholders get 10. In April 2020, Roku published its annual proxy statement, which indicated that Wood owned more than 52,000 Class A shares and 22.1 million Class B shares, giving him 68% voting power.

Buy, sell, or hold die, cash, and financial papers

Image source: Getty Images.

Over the course of the last year, Wood has converted some of his Class B shares to Class A shares, and sold 1.3 million Class A shares in total. However, these sales were done in accordance with SEC rule 10b5-1, which means they were planned in advance rather than being frantic last-minute actions. Additionally, Wood still owns 61,000 Class A shares and 17.1 million Class B shares as of December 2020 -- this equates to 96% of all Class B shares and nearly 14% of all outstanding stock , meaning he is still very much in control and still heavily invested in the company. That's good news for shareholders, but let's look a little more closely.

Digging deeper

According to Roku's proxy statement, Wood's salary in 2019 included $1.2 million in cash and 287,730 shares in stock options, which was equivalent to $11.5 million at the time. However, Wood didn't gain ownership of those shares immediately. Instead, they vest monthly over the course of a year, beginning in September 2022. Other executives were compensated in a similar way. Furthermore, the board of directors also stipulates that Roku's CEO must maintain a minimum share count equivalent to five times the position's base salary, and that all Senior VPs must maintain a share count equivalent to their base salaries.

This type of executive compensation is good for shareholders. It means Roku insiders have a financial incentive to run the business in a way that creates long-term value, because most of their salaries are paid in stock that doesn't vest for at least two years, and they are required to maintain a minimum level of ownership even after the stock is vested.

Strong financial performance

For investors who need more reassurance, look no further than Roku's strong financial performance. Roku is the leading streaming platform in the United States in terms of streaming hours, and roughly tied with Amazon's ( AMZN 2.47% ) Fire TV in terms of active accounts . The company's strong competitive position, along with the pandemic-driven increase in time spent at home, has helped Roku deliver exceptional financial results in 2020.

Metric Q3 2017 Q3 2020 CAGR
Revenue (TTM) $471.8 million $1,539.8 million 48%
Active accounts 16.7 million 46.0 million 40%
Hours streamed (TTM) 13.4 billion 52.6 billion 58%
ARPU $12.68 $27.00 29%

Source: Roku SEC Filings. ARPU: Average revenue per user. CAGR: compound annual growth rate. TTM: trailing-12-months.

In the third quarter, Roku's player unit sales increased 57%, which led to its highest player revenue growth in over seven years. Management also reported accelerating growth in the ad business, with monetized video ad impressions up 90% compared to a 50% jump in the second quarter. In other words, Roku's business looks healthy from a financial perspective.

A final word

Investors should always pay attention to insider buys and sells, since they can be an important indicator of how management views the company's future prospects. But not all insider selling is a bad sign, and not all insider buying is a good sign. Investors should also pay attention to the context. And in this case, given Roku's shareholder-friendly executive compensation, I don't think investors should lose any sleep. Roku is still a leader in a high-growth market, and the company should continue to benefit as more people cut the cord.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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