The latest earnings results for streaming media platform Roku (ROKU +2.34%) make it clear the company is still benefitting from advertisers shifting their spending away from linear TV.
Roku reported last week that overall revenue in the first quarter grew 79% year over year as more marketers followed the millions of viewers who have been canceling cable and signing up for streaming services. It was also aided by these same consumers spending more time watching content in the quarter. Of course, some of that was understandable, given the circumstances surrounding the pandemic and the need to social distance to avoid being infected.
But that great overall revenue growth news was just the tip of the iceberg.
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Higher-profit segment growing faster
Drilling down into the revenue growth data, we see there's more worth cheering in Roku's report. In its platform segment (by far the most profitable segment), Roku said revenue grew 101% year over year. That led to gross profit increasing by 132%. Additionally, folks spent 1.3 billion more hours watching content through the Roku platform in the first quarter of 2021 versus the fourth quarter of 2020 -- from 17 billion hours in Q4 to 18.3 billion hours in Q1.
The increase in hours watched reinforces the argument that the effect of the secular shift away from linear TV to streaming has less to do with COVID-19 and is just part of a long-growing trend. The past several months have coincided with easing business restrictions in the U.S., which would imply people are going out more often, especially those who are fully vaccinated. If people are going out more often, one would assume they are watching less content at home. Roku's reported numbers suggest that is not the case.
For shareholders, these numbers imply that the secular shift away from linear TV shows no signs of slowing. That should fuel consistent reports of revenue growth for several more years. And when you consider that Roku is only in the beginning phases of an international expansion, you've got a robust combination that should lead to expanding reach.
What this could mean for investors
Share prices for Roku's stock popped over 10% following its Q1 earnings release. But the stock price is still down nearly 9% year to date. While revenue growth has been fantastic and accelerating for Roku over the last five years, the company has yet to report an annual net profit. The market punished unprofitable growth stocks last month, and Roku has not been spared from the sell-off.
That could be an opportunity for long-term investors looking for a turbocharged growth stock with several years of runway before saturating its addressable market. Roku is trading at a forward price-to-sales ratio of 14.85 after reporting excellent results. That's down from its peak of over 24 toward the end of 2020.
Roku is worth owning for the long term, but there is no telling how long the current broad sell-off in these types of stocks will last. So to protect against the risk of paying too much, investors looking to start a position in Roku might want to spread their purchase allocation over the next several months. That way, if the price goes down further, you won't miss the opportunity to buy in when it's even cheaper.
