The coronavirus pandemic altered people's behavior significantly. No longer were people commuting to work. Kids were sent home for remote learning. And entertainment venues closed for an extended time. All of a sudden, folks were spending a lot more time at home. That created a surge in demand for in-home entertainment.
One of the most affordable and convenient ways to pass the time was streaming content. Roku (ROKU 6.82%) benefited from that shift in human behavior. Thankfully, several effective vaccines against COVID-19 have been developed, allowing the economy to reopen. While the world is not entirely back to normal, people are spending less time at home, which has hurt Roku in 2021.
Roku's account growth continues
Interestingly, Roku earns revenue from two sources: sales of its physical players connected to TVs, and platform revenue.
The physical players give TVs access to Roku's operating system. It allows any non-Roku branded TV to have the benefits of a Roku TV, which includes free access to the Roku channel. Management looks at the Roku players as an entry to its software platform, which generates the majority of its profits. Therefore, Roku is willing to sell its players at a small profit or even a slight loss to get households connected to its platform. That up-front investment pays off in the long run.
At the initial stages of the pandemic, demand for in-home entertainment was so high, Roku was selling its players at healthy profit margins. Indeed, it had a stretch of five consecutive quarters of positive gross profit on sales of players. That has turned around, and Roku has now had two successive quarters selling the players at a loss. Customer demand is cooling off, and supply chain disruptions are raising input prices. Management has decided to absorb the higher costs rather than pass them along to consumers.
Management is OK with that because it feeds into the lucrative platform segment. This is where Roku makes money from advertising sales and gets a percentage of sales revenue generated. For instance, if customers subscribe to Disney's Hulu streaming service from Roku's platform, Roku will get a portion of that sale. In its most recent quarter ended Sept. 30, Roku generated $582.5 million in revenue from the platform segment. That's up 82% from the same quarter last year. On those $582 million in sales, Roku's gross profit was $378.5 million.
Meanwhile, Roku generated a gross profit loss of $14.6 million on $97.4 million in sales from its player segment. You can see why management is willing to sell these players at a loss to get people connected to its platform.
To that end, Roku is succeeding. At the end of Q3, it had 56.4 million active accounts, up from 46 million at the same time last year. To further this growth, Roku is expanding internationally, with recent launches in Germany and Brazil, and plans to introduce Roku TV models in Chile and Peru in the near term.
Roku is an excellent business at a lower price
The coronavirus pandemic created a spike in demand for Roku products that is now slowing down. Still, Roku is a better business now than it was before the outbreak. For instance, it now has 56.4 million active accounts, up from 36.9 million at the end of Q4 2019.
Yet, the 29.7% drop in 2021 has Roku stock trading at a price-to-sales ratio of 12.6, which is near the lowest in the last two years. Given its relatively inexpensive valuation, continued account growth, and the long-run tailwind of consumers switching to streaming content, Roku stock looks like a buy for 2022 and beyond.