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How Roku’s Q3 Earnings Exhibited Its Leadership


Nov. 12 2019, Updated 4:25 p.m. ET

Roku (ROKU) received a vote of confidence a day ahead of its third-quarter earnings results on November 6. Many analysts were expecting impressive results. However, unlike its past seven earnings reports, which exhibited blowout growth, Roku’s third-quarter earnings beat Wall Street expectations but still led its stock to drop 16%. It closed at $118.46 per share on the day, but it’s now back up at $130.

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Expectations versus reality

Prior to Roku’s earnings report, Rosenblatt raised its price target on the stock to $159 from $134. It estimated that Roku’s third-quarter earnings and guidance were set to outperform expectations. The company’s revenue did just that, soaring both on an absolute and a per-user basis.

But Roku ended up reporting a loss of $0.22 per share compared to $0.09 in the previous year’s quarter. Along with its mixed third-quarter results, its disappointing fourth-quarter guidance discouraged investors. The guidance featured a decreased outlook on profitability due to a recent acquisition and operational costs related to international growth.

Overall, Roku announced what seemed to be positive results and better-than-expected third-quarter revenue. Its active accounts increased by 1.7 million, and it beat revenue estimates, achieving growth of 50% year-over-year to $260.9 million. Roku even increased its revenue estimate for the fourth quarter to $396 million and for 2019 to $1.11 billion. But investors seemed to focus only on the net loss.

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Competition is firing up—but is it really a threat to Roku?

Comcast (CMCSA) recently launched its Xfinity Flex streaming box. But Martin Luther King Jr.’s daughter, Reverend Bernice King, is accusing the company of practicing racial discrimination and trying to dismantle the Civil Rights Act of 1866. The company is heading to the US Supreme Court amid many other regulatory pressures calling for its breakup. US Democrat Bobby Rush is among those leading the charge.

Facebook (FB) launched its Portal TV streaming device along with an experimental news content section to prevent its users from leaving to other news sites. For years now, the company has been quietly changing its algorithms and enhancing its content, up to the point of “cloning” Snap’s (SNAP) Snapchat’s features to appeal to Generation Z users.

Apple’s (AAPL) up-and-coming services have enabled it to hit an all-time high with record revenue of $64 billion despite a slump in its iPhone sales. iPhone sales were always the main driver of its revenue, but its strategy of shifting from hardware to subscription services seems to be working. Moreover, Roku just announced that its updated mobile app works on the Apple Watch, turning it into a device capable of much more than just switching channels.

The Walt Disney Company’s (DIS) Disney+ is now available on both Roku streaming devices and Roku TV. The company can provide family-friendly content in the form of hundreds of films and thousands of TV episodes not only from Disney but also from Marvel, Star Wars, Pixar, and National Geographic.

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Why Roku is winning

Overall, Roku is on the winning side as a distributor, as it’s getting revenue from Apple, Disney, and Netflix (NFLX). It’s no wonder many analysts believe Roku will continue benefiting materially from all this competitive activity—and perhaps even outperform its fourth-quarter guidance. Compared to Netflix’s most expensive streaming package, Roku’s average revenue per user over the trailing 12 months is 40% higher. Moreover, current trends indicate there’s still plenty of upside left for Roku to boost its performance.

Overall, Roku remains in an enviable position. It’s a top distributor, and it’s also growing with the help of its so-called competitors. It still has a unique position in the market thanks to its business model—a rare one in which everyone wins.

Outlook for Roku stock

Many expect it to be challenging for Roku to turn a profit in the coming years due to its costly international expansion. It will also have to compete for TV licensing contracts. But Roku has positioned itself as a key benefactor of the shift from traditional TV to streaming. Just like the last time its stock dropped due to unnecessary panic, many analysts and investors seem blind to the fact that it’s a rare company that’s flourishing in a relatively safe position despite the storm that’s raging around it.

Wall Street’s post-earnings reaction seems to be purely based on Roku’s reduced profitability outlook. Roku is aiming for an adjusted EBITDA of $30 million for the year. Considering this decision was made because it will be focusing on investing in sustained growth, it doesn’t seem like a sign of an underlying problem. The stock has soared almost 400% since January, and it ended the third quarter with an even more improved fourth-quarter revenue outlook.

Roku’s platform business is just one of the strengths that will enable it not only to survive the streaming wars but also to emerge as one of the key players in the future of TV.

This article is contributed by IAMNewswire.com. It was written by an independently verified journalist and is not a press release. It should not be construed as investment advice.

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