Is Roku Ready for a Comeback?

Roku (ROKU -0.56%) reported revenue that came in just above analysts' estimates for the first quarter, but there are still some question marks as the streaming company works through a tough environment. Management reiterated its outlook for 35% revenue growth for the full year, but after just 25% growth in the first quarter and an outlook for 28% growth this quarter, it's unclear it'll get there.

Let's take a deep dive into Roku's financials to get a better picture of whether Roku can reach 35% revenue growth for the year, and what it means for investors.

Image source: Getty Images.

Three reasons management is confident

CFO Steve Louden was asked to square his reaffirmation of his full-year outlook during Roku's first-quarter earnings call. He pointed to three main reasons behind his estimates.

First, he noted "the robust growth we're seeing in the ad business and the relative growth in monetization relative to peers." Indeed, Roku's platform segment saw revenue grow 39% year over year. Average revenue per user (on a trailing-12-month basis) was up 34%. The platform business now accounts for the bulk of revenue for Roku -- about 85%.

Second, Louden pointed to the numbers. He initially called out the comparable periods and noted that the second half of the year will provide easier comparisons. This will result in greater year-over-year growth. The front half of the year saw revenue grow 80% year over year, while the back half slowed to a 40% growth rate.

More importantly, Louden also said he's looking at historical sequential growth rates. The historical sequential growth may be the best tool for estimating Roku's revenue results in the near term.

Breaking down Roku's revenue growth

Roku reports revenue in two segments: platform and player. Historically, the fourth quarter is the strongest for both segments. The third quarter can produce slightly better results than the second quarter for the player segment and modestly better revenue for the platform segment.

Historical third-quarter sequential growth looks like this:

Data source: Roku. Table by author.

There are some important anomalies to point out. First, you'll see platform revenue grew 30.4% sequentially in the third quarter of 2020. Remember, this is coming off the start of the COVID-19 pandemic when advertisers were very uncertain and pulling back on spend in the second quarter. As a result, third-quarter revenue grew much more on a sequential basis.

The negative 13.7% change in third-quarter player revenue may be attributed to the supply-chain constraints that started during that period. Roku has adjusted its strategy to focus on selling players at negative cost, focusing on driving account growth. The supply-chain constraints likely showed up in ad spend on Roku's platform during the third quarter, as well.

All told, the 2017-2019 average may be the best estimate for both player and platform sequential growth in the third quarter

Here's the same look for the fourth quarter:

Data source: Roku. Table by author.

The fourth quarter of 2020 was another weird quarter for Roku's player segment. The company was having no trouble selling units during the early days of the pandemic and didn't promote them as much during the fourth-quarter holiday season that year. As such, sequential growth didn't see its usual bounce.

The platform business continued to suffer at the hands of supply constraints in the fourth quarter last year. Both the auto and consumer packaged-goods verticals pulled back on advertising as they fought supply-chain issues. While those issues are still ongoing, Roku is lapping the impact, so sequential growth rates should return to historical levels.

Investors should expect normal sequential growth rates for both segments in the fourth quarter -- about 66% for player and 48% for platform.

When you add it all up, including Roku's second-quarter outlook, Roku will produce revenue growth in the high-30% range if it meets its historic averages for both segments. Reducing those numbers by about 10%, based on the maturity of the business, gets it to its full-year guidance of 35% revenue growth. 

In other words, the outlook still looks very achievable despite the weak growth in the first half of the year.

Don't forget the long term

While Roku appears on track to meet its near-term outlook -- despite some skepticism from analysts -- the long-term potential of Roku remains the reason to invest. Roku's the leading streaming content-distribution platform and is investing heavily to expand internationally and grow engagement in its established markets. That long-term potential can often be overshadowed by short-term financial results.

That said, now might be one of the best opportunities to get into Roku stock as it looks poised to see revenue reaccelerate in the second half of the year.