7 Nov

Roku Q3 Earnings Slump Amidst Fierce Competition

WRITTEN BY Aditya Raghunath

Roku (ROKU) investors lost close to 15% today. On November 6, the company announced its third-quarter results after the market close. Roku stock slumped in after-hours yesterday due to its fourth guidance. The guidance was marginally below consensus estimates.

But does the pullback provide an opportunity for investors? Or will the stock move lower as we inch close to 2020? Let’s look at the company’s major takeaways from its third-quarter results.

New streaming devices launched

Roku launched several new streaming devices in the third quarter. In September, the company launched a new lineup of streaming devices for the US and international markets. Roku said that the first response to these devices is encouraging.

The company’s Streaming Stick+ was voted the best overall streamer by CNET for the third consecutive year. The player revenue segment saw sales rise by 11% to $81.6 million in the third quarter. Also, this segment made up 31% of total sales.

However, the player segment accounted for 42% of sales in the prior-year period. Several larger players in this space hurt its sales. Roku competes with Apple TV, Amazon’s Firestick and Google’s Chromecast in the device streaming market.

Further, this segment continues to attract new players. Also, Comcast (CMCSA) and Facebook (FB) are looking to enter this market. Currently, Roku dominates this space. However, the company will find it difficult to compete with the big players in international markets.

Roku will benefit from multiple streaming players

Netflix (NFLX) was once the undisputed king in online streaming. However, as cord-cutting continues to gain pace in the US and international markets, competition has risen significantly, too.

Tech giants like Amazon (AMZN), Apple (AAPL), and Disney (DIS) are battling it out to gain subscribers. According to market research studies, the average US household will have around three streaming services. This is set to benefit Roku as it gets a licensing fee from the streaming companies.

Last week, Apple TV+ launched while Disney+ will launch on November 12. Every time a user subscribes to a streaming service on Roku, it will get a percentage of this subscription. Recently, Roku announced that it will stop supporting Netflix from December 1. However, Netflix is still the largest streaming platform. This might hit Roku’s licensing sales in the fourth quarter.

Roku is bullish about advertising

While Roku’s Player platform sales were up 11%, the Platform business saw 79% growth in Q3. The Platform business makes up 69% of total sales. In addition to licensing, this segment gets revenue from subscriptions and advertising.

Ad-supported viewing is the fastest-growing segment for Roku. Monetized video ad impressions doubled in the third quarter primarily due to Roku Channel. Recently, the company bought Dataxu for $150 million. Also, the company plans to take on The Trade Desk in the programmatic advertising space.

During the earnings call, company CEO Anthony Wood stated, “While we work with many leading DSPs and will continue to do so, we believe the dataxu acquisition will accelerate our OTP advertising road map and enable Roku to provide marketers a single data-driven software solution to plan by and optimize their ad spend across TV and OTT.”

Analysts aren’t impressed

Roku’s third-quarter results didn’t impress most analysts. Investment bank Morgan Stanley is wary of slowing gross profit in the Platform segment. Also, it has a 12-month target price of $100 for the stock, according to a report from The Fly.

Guggenheim reduced the stock’s target price from $170 to $150 and reiterated a “Buy” rating. However, RBC Capital’s Mark Mahaney raised Roku’s price target from $155 to $160. Also, Mahaney is bullish on Roku’s market opportunity in the ad-supported OTT space.

Roku stock has been on a tear since its IPO. The stock gained 350% since its IPO in September 2017 but has also been very volatile in these two years. It rose from $18.8 in October 2017 to $73 in September 2018, before falling to $27 by the end of last year. Roku is currently trading at $119.4. This is 32% below its record high.

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