Roku (ROKU -2.06%) is making headlines lately because of its spat with Alphabet's YouTube. With Roku set to report first-quarter earnings on Thursday, May 6, that will certainly be on investors' minds, and management may face a question or two over its battle with the powerhouse during the conference call that follows the announcement.
More importantly, investors will want to know how people are changing their preferences for entertainment, measured by overall streaming hours on Roku. As states throughout the U.S. are easing restrictions on businesses, and as more Americans are getting vaccinated, folks are venturing outside more often. That can potentially be a headwind for Roku as people stream less content to their televisions.
The next few quarters may be difficult for Roku
In Roku's fourth quarter, it reported record streaming hours on its app. Overall, folks streamed 55% more hours of content on their Roku devices compared to the same period last year. People already spend more time indoors during the winter months. Add to that the winter surge in COVID-19 cases and users had a strong incentive to stay indoors and stream content. The opposite case may play out when Roku reports its first-quarter results, as more people are getting vaccinated, the number of people getting sick with COVID-19 decreases and more people venture out to once again socialize.
Despite the short-term volatility, Roku is the beneficiary of a secular tailwind. According to Parks Associates, 43% of all broadband households in the U.S. that currently pay for traditional TV are likely to switch to streaming in the next 12 months.
Another way Roku is getting people to stream more hours is by expanding its reach. It's now available in the U.K., Canada, Brazil, and Mexico. It's already the No. 1 smart TV operating system in Canada and is making good progress in its other international markets.
The vast majority of Roku's gross profits come from its platform segment, where the company sells ads to marketers. In the most recent quarter, $300 million of the company's $305 million gross profit came from the platform segment. And, of course, marketers are willing to pay more money if they can reach larger audiences. That's one reason why the overall streaming hours metric is so important.
What this could mean for investors
Analysts on Wall Street expect Roku to report revenue of $490 million and a loss per share of $0.15, which would be increases of 52.9% and 333%, respectively, from last year.
In the last 12 months, share prices for the streaming platform provider and streaming hardware producer are up over 180%. Still, it's trading at a forward price-to-sales ratio of 17, down from its peak of above 24 earlier in the year. If Roku's stock price falls following the report, it could be a buying opportunity for long-term investors looking for a high-growth stock and willing to accept the higher risk that comes along with such stocks.
Roku's long-run prospects are excellent with the secular shift from linear TV viewing to streaming. Further, Roku's planned international expansion could add millions of new viewers that marketers will want access to.