Roku Stock Surged 11% And Is Positioned For Continued Growth

As the health crisis now enters its eight month, consumers are seeking safe comfort in streaming content in the comfort of their own home. Roku Inc's ROKU shares surged 11% in Friday's trading after the streaming video platform reported stellar third-quarter earnings. Revenue and EBITDA came well above Street estimates.

Highlights

The growth of The Roku Channel, its ad-supported streaming service, grew its reach to 54 million people.

The stronger demand has translated to increased ad revenue and player unit sales which grew 57% from the prior-year quarter. Base of active accounts expanded 43% to 46 million, while streaming hours rose 54% as they reached 14.8 billion.

Third quarter's revenue amounted to $451.7 million, marking an 73% year-over-year increase during the quarter, exceeding analyst estimates of $367.8 million. Diluted earnings of 9 cents a share easily exceeded forecasts that estimated a loss of 40 cents a share.

A Durable Change

CFO Steve Louden stated that the pandemic triggered a lasting and durable change in how marketers are approaching their TV ad budget spending. Moreover, Roku is seeing 100% retention in advertisers who spend more than $1 million and does not anticipate them moving back to linear platforms. There is no going back. Monetized video ad impressions skyrocketed nearly 90% YoY during the quarter. During the previous quarter, this increase was 50% on the same basis.

Not only are existing brands growing their ad spending but many new advertisers are shifting into streaming to reach customers who are leaving traditional linear television behind. These first-time advertisers more than doubled YoY during the quarter. Considering that 97% of brands spent $1 million or more with Roku in Q3 2019 continued to invest in Q3 2020, it seems that once they discover Roku, they tend to stay on board.

Expansion

One of the best perks of Roku is the fact it thrives with increasing the number of streaming players. It has a deal with Comcast Corporation CMCSA to distribute Peacock and include NBCUniversal content in The Roku Channel, including a live stream of NBC News. As more media companies move toward streaming and need to partner with Roku, the company can leverage its growing active accounts to win more content for The Roku Channel in exchange for distributing direct-to-consumer content. Roku has been gaining strength in its negotiating position over the past year. Meanwhile, Roku is also expanding the footprint of The Roku Channel away from its platform as it recently made a deal to stream on Amazon.com, Inc.'s AMZN Fire TV devices. It also just launched a mobile app, which lets users stream on their phones.

Outlook

Roku estimates that Q4 revenue growth will be in line with previous holiday seasons, more precisely in the mid-40% range. However, due to macroeconomic uncertainty from global coronavirus case resurgences to weakened consumer spending levels, formal guidance for Q4 figures was not provided. The company's pre-pandemic full-year outlook, that was issued back in February, guided for 42% YoY revenue yearly growth, approximately breakeven EBITDA and a loss in the range between $160 million to $180 million.

How Much Does The Pandemic Weigh?

During the last reported quarter, Roku delivered outstanding financial and operational results. It saw a robust demand for TV streaming products, strong growth in advertising and the expansion of partnerships for content distribution. COVID-19 did Roku a great favor in accelerating the shift of consumers moving away from traditional linear and pay TV. However, the stock was selling off on Monday after Pfizer Inc.'s PFE blockbuster vaccine news. Yet, Roku was doing great before this virus even started its relentless march across the globe. It counts on Walmart Inc WMT, a very strong partner of Roku's, which sells millions of Rokus a year.

Therefore, Roku continues to invest in competitive differentiation and execute well its strategic plan, it does not have to worry about pandemic becoming history anytime soon- a scenario the world is hoping for. Cord cutting started half a decade before the pandemic struck, and the world isn't going back to traditional broadcasting any time soon. Pandemic or no pandemic, Roku still has a lot of room left for growth.

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