There’s a clear logic to the knee-jerk response. But there’s also far more to the story.
There’s no doubt that shareholders didn’t like what Roku (ROKU 2.53%) had to say in Wednesday’s third-quarter report. Although the streaming technology company topped its revenue and earnings estimates, guidance for the current quarter was disappointing.
Roku also announced it would no longer be disclosing a closely watched customer metric, prompting some investors to wonder if the organization is attempting to bury problematic data. All of it sent Roku stock down to the tune of 21% on Thursday.
The big pullback, however, is ultimately a buying opportunity. Aside from Q3’s earnings beat and its continued user growth, three important but overlooked realities are still working in Roku’s favor.
The bullish arguments collectively hold more water
Roku is of course the maker of North America’s most popular streaming video technology, which is found in dongles as well as in television sets themselves.
It’s not just hardware though. Indeed, devices aren’t even Roku’s big profit center. They’re simply a means to an end. The company’s core moneymaker is actually serving as a middleman between consumers and streaming content creators. This business makes up about 90% of its revenue, in fact, and accounted for all of its third-quarter’s gross profits — profits that improved another 30% year over year, lifted by more users of its tech.
So what went wrong to send shares careening? Guidance, mostly.
For the fourth fiscal quarter now underway the company’s only looking for gross profits of $465 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $30 million, versus analysts’ consensus estimates of $477 million and $36.2 million, respectively. The decision to stop reporting its active household headcount further roiled investors, who fear they’ll now have less clarity as to the condition of Roku’s operation.
And to be fair, the market’s response is understandable. On the flip side, the market’s ignoring three hugely bullish details about Roku’s reality.
The first of these details is the fact that this company’s revenue, gross profits, and EBITDA each continue to grow.
While sales and gross profits are expected to grow again in Q4, EBITDA probably won’t. Don’t panic though. Although the likely tumble from Q4 2023’s EBITDA of $47.7 million is seemingly a step in the wrong direction, that contraction will probably stem from some combination of increased spending on research and development, sales and marketing, and/or administrative costs (with most of this increase likely stemming from aggressive marketing efforts during the all-important holiday shopping season). As you can see on the chart below though, these expenses have remained mostly tamed since late 2022 without crimping revenue, gross profit, or bigger-picture EBITDA growth.
Data source: Roku Inc. Chart by author. Figures are in millions.
Said another way, the company’s getting more bang for every buck it’s spending than it did in the past.
The second aspect of Roku’s business the market is errantly ignoring now is the continued growth in the hours of streamed content it’s facilitating, and the average revenue per user (ARPU) this consumption creates.
Although they’re related, these two metrics don’t necessarily change hand in hand. Streamed hours is a measure of how much time Roku users are collectively sitting in front of their connected televisions, while ARPU is a measure of how well the company is monetizing each of these users.
More often than not, the bigger a company gets the less per-user revenue it’s able to muster simply because discounts are offered in order to maintain customer growth. Impressively though, Roku’s per-user revenue is holding up — and even inching upward — despite its growing scale. It’s a testament to the value that this company and its technology brings to the table.
Data source: Roku Inc. Chart by author. Streamed hours are in millions.
Of course, the ongoing growth in the amount of streaming content Roku is serving up every quarter is also a clear clue that consumers love its technology.
Finally, while there’s nothing to chart, know that Roku has a long history of beating its earnings estimates. It’s topped its per-share profit expectations in 10 of its past 15 reported quarters, in fact, with most of those shortfalls materializing during and shortly after the height of the COVID-19 pandemic when the company was still regrouping from the pandemic-prompted rush. It’s also been more apt than not to top revenue estimates.
Although Roku didn’t offer any per-share profit guidance for the fourth quarter, given its past, it’s possible the company could be understating the gross profit and EBITDA that’s actually in store for the quarter now underway.
Growth investors, just hold your nose and dive in already
A risk-free trade? No, Roku stock still brings plenty of risk to the table. If nothing else, this post-earnings setback illustrates just how easily investors can sour on this ticker at just the slightest of red flags. This isn’t the first time this stock has been upended, and it likely won’t be the last.
Take a step back and look at the bigger picture though. There’s more working for Roku than against it, and there’s a long growth runway ahead for it to continue making progress. Market research outfit Precedence Research predicts the global streaming market is poised to grow at an annualized pace of nearly 21% through 2034, yet Roku’s barely turned its attention beyond North America. There’s a massive amount of opportunity ahead no matter how or when Roku wants to plug into it.
Bottom line? If you can stomach the volatility, don’t overthink this one. Thursday’s tumble is a chance for investors to dive into this industry’s growth potential with a leading name in the business.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.
