It’s been an eventful November for Roku (NASDAQ: ROKU)
. On November 6, shares climbed 12.6% to all-time highs after the streaming company reported Q3 earnings.
The very next trading session was November 9 – the day the Pfizer (NYSE: PFE) vaccine news came out. Investors feared that Roku – one of the most prominent pandemic winners – would see growth slow if the “new-normal” becomes the “old-normal.” Roku shares spent the rest of that week finding their footing, giving emotionally exhausted shareholders a much-needed break.
But last week, Roku resumed its uptrend in earnest, soaring 15.4% over the full week to fresh all-time highs. The increase was partially driven by news that Roku is close to a deal with AT&T’s (NYSE: T) WarnerMedia to carry HBO Max.
Let’s start by looking at Roku’s Q3 performance. Then, we’ll examine the company’s long-term growth prospects. Finally, I’ll answer the question of whether Roku has more upside from here.
Q3 Was Outstanding
Roku blew away expectations on both the top and bottom lines in Q3.
Revenue was up 73% yoy to $452 million, while analysts were expecting $369 million. Net income was $13 million versus a projected net loss of $25 million.
Revenue growth is – by far – the most important thing for Roku right now. This company has a massive growth opportunity in front of it (more on that in a bit), and you want to see Roku pursue that growth rather than try to squeeze out an extra few million in quarterly profit. That said, it’s nice to see the company beating expectations, and it doesn’t seem like Roku traded growth opportunities for present-day net income.
Moving beyond the headline numbers, there was a lot more to like:
- Roku is faring well in the UK and Canada – player sales doubled in both countries. And Roku TV is still leading in the US.
- “Engagement on the platform continues to grow with Roku users streaming 14.8 billion hours in the quarter, up 54% year over year, and streaming hours per active account increasing at a more normalized rate of 9% year over year as COVID-related restrictions were lifted during the summer.”
- The company added 2.9 million incremental active accounts in Q3, taking it to 46 million active accounts – up 43% yoy.
- Roku monetized video ad impressions were up almost 90% yoy compared with roughly 50% yoy in Q2.
“Advertisers leaned into Roku” in Q3. To say that’s good news would be an understatement. Roku had previously feared that ad spending would not be anywhere close to normal until the second half of 2021.
Live sports provide another reason for optimism: Some had feared – justifiably, I might add – that the returns of the NBA and NFL would slow the shift to Roku. Those fears clearly weren’t realized.
A Leader in a Growing Market
Fortune Business Insights projects that the streaming video market will grow at a 12% CAGR over the next seven years, taking it to $843 billion by 2027.
Roku, as an industry leader, can easily grow at a much faster rate. Macquarie, for example, thinks that Roku will see upwards of 35% revenue growth for at least the next three years.
Roku’s valuation is lofty at 21.3x its current sales, but at those growth rates, Roku could be a bargain five years from now.
And while I think Netflix (NASDAQ: NFLX) is an excellent company, there’s no denying that it faces intense competition for content. Competition that drives up costs. A lot. Roku doesn’t have to worry about spending money to produce content, which means that earnings have a better chance of materializing in the future.
Roku Set for Strong Q4
I’m optimistic about Roku’s prospects in a post-vaccine world, which – with the vaccine coming sooner rather than later – is most important when making an investment decision.
But with the winter approaching and coronavirus cases surging, Roku looks set for a strong quarter. On its Q3 call, Roku said it expects revenue growth in the mid-40% range. That seems way too low, and Roku could easily blow away expectations again.
Couple that with Roku closing in on a deal with HBO Max, and you have two short-term catalysts for another leg-up.
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