The streaming entertainment sector has been among Wall Street's best performers throughout the coronavirus pandemic, and for good reason. Companies in this industry benefited from the cancellation and scaling back of many other entertainment options as people spent more time than ever at home.
With the numbers of vaccinated people increasing steadily, however, economies and leisure activities are slowly starting to open back up, creating a potential headwind for the streaming business. This has some investors worried.
Roku (ROKU), though, seems to be defying the odds. Its impressive first-quarter results show an acceleration of growth. Among the many players in the streaming space, is this San Jose-based business the one you should invest in?
Roku's blowout numbers
In the first quarter, Roku's performance was absolutely off the charts.
Revenue skyrocketed 79% higher year over year with platform sales more than doubling. The platform segment accounted for 81% of the top line in the first quarter, up from about 73% in the year-ago period. This continues a promising trend as the segment carries a gross margin of 66.9%, which was also up over 10 percentage points year over year. As a result, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin has been rapidly rising over the past several quarters and now sits at 21.9%.
Roku's 53.6 million active accounts watched a total of 18.3 billion hours of content via its platform during the quarter. Additionally, ARPU (average revenue per user), a key metric for the company, jumped 32%. As more users join the platform, they're engaging more with the service as well.
Don't expect this momentum to slow down next quarter, either. Management is forecasting another robust three months. Sales and gross profit are expected to rise 73% and 104%, respectively, in the second quarter.
But the company does think its results in the second half of 2021 will be less impressive, if only because of the tougher year-over-year comparisons. The company delivered outstanding performance in the third and fourth quarters of last year as a result of ad dollars shifting to digital channels following a slowdown in spending driven by pandemic uncertainty. The launch of multiple streaming services added to its strong gains at the end of 2020.
This kind of volatility in business conditions shouldn't be a surprise, especially because of 2020's economic unpredictability. Just know that as streaming continues to gain ground in the home entertainment market, Roku is set to benefit for many years.
Why it outshines its content peers
Netflix, which is not necessarily a competitor of Roku's but instead a content partner, experienced a sharp slowdown in its first quarter after record-breaking gains last year. Part of that can be traced to the meaningful pull-forward of new subscribers. But another major contributor to Netflix's growth deceleration was the emergence of new streaming options like Disney+, HBO Max, Peacock TV, Paramount+, and discovery+.
That Roku's business is still powering forward while Netflix is taking a bit of a breather demonstrates why the former is at an advantage compared to its content-centric peers.
Because Roku basically operates a streaming ecosystem, it is indifferent to which content producers succeed and which fail. As long as people keep cutting the cord to traditional pay-TV and stream their content instead, the company stands to profit. Its platform sits right in the middle of the shift to streaming entertainment, putting it in a prime position.
Roku's share price has fallen about 36% in the past three months, which sweetens the deal for investors. The company just reported a fantastic quarter, highlighted by substantial revenue, user, and engagement growth. What's more, it's in an advantageous position, because as more content services are introduced, its value proposition improves.
Based on the way things look, Roku is the best streaming stock to own right now.