Please ensure Javascript is enabled for purposes of website accessibility

Don't Bury Roku: It's Not Dead Yet

By Rick Munarriz - Updated May 7, 2021 at 3:47PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors bailed on Roku on Thursday. They're regretting it on Friday after a blowout quarterly report.

It takes a lot to send a stock reeling just minutes before it reports fresh financials. Shares of Roku (ROKU 3.92%) plummeted nearly 7% on Thursday. It was a rough day for high-octane growth stocks, but some of the market's streaming leaders clawed their way back to positive gains by the end of the day. Roku got left behind. 

One can argue that investors feared Roku would disappoint the market with its first-quarter performance. We've seen high-flying stocks swoon even after largely decent quarterly updates. The rub here is that the stock closed on Thursday 42% below the all-time high it hit less than three months ago. There was no crust of optimism on this earnings pie. 

The market was more indifferent than outright bearish with Roku. The stock's short interest is a third of what it was a year ago. Wall Street had come down with Roku fatigue. Bulls and bears alike were ho-hum about the streaming pioneer, probably figuring that it would be hard for it to come through with monster financials after packing years of growth into just a few months during the pandemic. Roku was about to give everybody who'd left it for dead a big surprise.

A zombie hand rising up from the ground in a graveyard against a full moon.

Image source: Getty Images.

Rocking Roku  

Just around the time that Roku stock was hitting all-time highs in mid-February, it issued guidance calling for $478 million to $493 million in net revenue, a 49%-to-53% increase over the prior year's showing. Roku has historically been conservative in its outlooks, but analysts on average looking for 53% year-over-year top-line growth suggests that they thought Roku wasn't going to pull a rabbit out of the hat. 

Abracadabra! 

Revenue soared 79% to hit $574.2 million for the quarter. Platform revenue more than doubled, now accounting for more than 80% of the revenue mix. This is naturally the high-margin segment for Roku over its now significantly smaller hardware business, but even there analysts couldn't piece it all together. All 24 analysts covering Roku expected a quarterly deficit. Roku is clocking in with a net income of $0.54 a share. 

This is the third time in a row that Roku has scored a profit as Wall Street pros were bracing for a loss. Let's hope those crystal balls have money-back guarantees. 

Roku's popularity continues to expand. It had 53.6 million active accounts by the end of March, a 35% increase over the past year. We're now lapping the start of the pandemic, when we did a lot of streaming during the "shelter in place" phase of the COVID-19 crisis, but the record 18.3 billion hours streamed by Roku users in January, February, and March combined this year is 49% ahead of where it was a year ago. 

Good things happen when consumption is growing faster than an audience headcount, and Roku is a dinner bell for marketers right now. With advertisers hungry to reach viewers who can no longer be accessed through old-school linear television, average revenue per user for the otherwise free Roku service has risen 32% over the past year. Average revenue per user is now $32.14 over the trailing 12 months, and that figure keeps moving higher as connected TV advertising continues to boom. 

Things aren't perfect. Roku wasn't able to provide an update on its tiff with Alphabet's (GOOG 2.36%) (GOOGL 2.39%) YouTube TV during Thursday afternoon's earnings call. It's a lose-lose distraction that could hurt both parties if it's not properly resolved. 

Thankfully, that's pretty much the only blemish on the next-gen media stock's beat. Roku's guidance for the current quarter calls for revenue growth of 71% to 74%, a forecast that's even more impressive given how Roku historically undersells its reality. Gross profit is expected to more than double. I think the days of analysts fetching red-ink pens are done here. The days of investors cashing out moments before a Roku earnings report might be toast at this point, too.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rick Munarriz owns shares of Alphabet (C shares) and Roku. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Roku. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$83.81 (3.92%) $3.16
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$121.68 (2.39%) $2.84
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$122.65 (2.36%) $2.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.