It's been a challenging year for investors in Roku (ROKU +2.95%), the TV streaming service. After shooting up almost 150% in 2020, Roku stock is down 16% in 2021. The third-quarter report, released last week, didn't do anything to quell concerns about how much growth looms ahead for the company, and the stock sank some more.
But investor fears aren't totally founded. In fact, I think the situation isn't quite as bad as some investors think, and there's room for optimism.
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No surprises
When investors were pumping money into Roku stock last year, it was widely believed that those growth levels weren't sustainable in a post-coronavirus world, and that's what's playing out right now. Management and investors alike were expecting growth to recede, and so there really aren't too many surprises here.
In the third quarter, sales came in squarely in the middle of internal expectations, growing 51% year over year. Net income came in much lower than last year, but way above guidance at $13 million, and average revenue per user increased close to 50%. The service added more than a million active accounts, and streaming hours were up, both year over year and as compared to the previous quarter.
These are all signs of a healthy company. In particular, advertising growth was strong with revenue from its streaming platform increasing 82% over last year. That's probably the company's most important number, because that's where its future lies.
By now, cord-cutting is a fairly standard phenomenon with customers moving away from traditional television networks to streaming. As that happens, advertisers are moving over to where viewers are going. And that benefits Roku, which operates a free, ad-supported streaming channel.
Roku has heavily invested in its channel with its relatively new Roku Originals programming, and customers are responding. As new viewers keep coming, Roku invests in more programming, and advertisers follow, which gives the company a nice flywheel effect that keeps revenue growing.
In the third-quarter conference call, CFO Steven Louden gave three reasons why it's likely that the platform business can keep growing: 1. customers are still cord-cutting, 2. Roku has a well-oiled system for content publishers to move to its platform, and 3. There's still ample room for advertisers to move their money over to streaming.
Is it immune to supply chain problems?
Aside from streaming itself, Roku has another business selling streaming players. It has a large selection of devices that hook up to your screen for streaming purposes, and this was a loser in the third quarter with sales declining 26% year over year. The company attributed it to supply chain backups and higher costs, which management said it did not pass on to customers, resulting in lower gross margins. The company expects this to continue into 2022. However, it's worth noting that player revenue was still higher than pre-pandemic numbers.
By contrast, Roku's much larger streaming business has no supply chain challenges and has a lot of favorable trends that outweigh the negative issues associated with the player business. That's just another reason that makes Roku attractive.
Optimistic stock outlook
Things are expected to slow down even more in the fourth quarter with management giving guidance for about a 37% sales increase and a potential net loss of $5 million. Plus, Roku shares trade at 135 times trailing 12-month earnings, which is far from cheap.
But there are a lot of positives in the company's business, and trends are still moving in the right direction. Times might continue to be tough in the short term, but long term there's a lot of potential left for this streaming stock.
