Streaming video platform Roku (ROKU) is the on-ramp to internet television for many consumers. Investors have taken notice of its key position, especially as more people have used its service during the Covid-19 pandemic. But is Roku stock a buy right now?
The San Jose, Calif.-based company started as a unit of internet television network Netflix (NFLX), making the company’s first set-top box. But Netflix decided it wanted to be hardware agnostic, so it divested the business in 2007.
After the divestiture, Roku kept making set-top boxes and also added streaming sticks to allow consumers to access internet video services such as Netflix, Hulu and Amazon (AMZN) Prime Video. It later licensed its operating system to smart TV manufacturers.
Today Roku gets most of its revenue selling advertising on its platform, including commercials for ad-supported services such as its own Roku Channel. Plus, it takes a share of pay-per-view and subscription revenue from third-party services sold through its platform. Roku stock is seen tied to the shift of television ad dollars to streaming from traditional broadcast and cable services.
Consumers are increasingly turning to free, ad-supported internet video networks to manage their entertainment budgets. Roku saw the trend toward ad-supported video-on-demand coming while others were focused on subscription video-on-demand. It knew that consumers would reach a limit for how many services they’d be willing to pay for.
Roku News: Rapid User Growth
Wall Street analysts say Roku stock is a play on the trend toward “cord-cutters” and “cord-nevers” — people canceling traditional pay TV services or never signing up for them.
Roku ended the December quarter with 51.2 million active user accounts, up 5.2 million from the prior quarter. Roku stock jumped 2.3% on the news, released Jan. 6.
Average revenue per user climbed to $28.76 in the fourth quarter, up 24% from the same quarter last year.
To date, Roku’s user growth has come mostly from the U.S. and Canada. It is just getting started on its international expansion. The company now operates in more than 20 countries including the U.K., Mexico and Brazil.
Roku is benefiting from the launches of new streaming video services such as Walt Disney‘s (DIS) Disney+ and Apple‘s (AAPL) Apple TV+. It also added Comcast‘s (CMCSA) Peacock, AT&T‘s (T) HBO Max and ViacomCBS‘s (VIAC) Paramount+.
Because of Roku’s extensive reach through smart TVs and streaming gadgets, it is a logical partner for third-party streaming services.
Needham analyst Laura Martin has described Roku as “an arms dealer” in the internet television battle. She rates Roku stock as buy.
Adding Exclusive, Original Content
Roku has seen its usage surge as a result of people staying home during the Covid-19 pandemic. Roku users streamed about 17 billion hours of content in the December quarter, up 55% year over year, amid the home entertainment boom.
Meanwhile, advertising spending has weakened during the coronavirus pandemic and resulting recession. Categories seeing the biggest ad spending drops include travel, restaurants, theatrical and automotive.
At the same time, companies are shifting their advertising budgets to streaming from traditional TV.
Lately, Roku has been bulking up its exclusive and original content for the Roku Channel. The channel mostly streams licensed movies and TV shows. In March, it acquired the popular home-remodeling series “This Old House.” Roku also bought the U.S. and Canadian streaming rights to action-drama series “Cypher.”
On Jan. 8, Roku announced that it had acquired the content library of defunct streaming service Quibi. It will offer more than 75 Quibi shows on its free, ad-supported Roku Channel. Roku stock rose 5.2% on the news.
On March 1, Roku and media measuring service Nielsen (NLSN) announced a strategic alliance.
As part of the deal, Roku will acquire Nielsen’s Advanced Video Advertising business, which includes Nielsen’s video automatic content recognition and dynamic ad insertion technologies. Roku also will integrate Nielsen ad and content measurement products into the Roku platform. Financial terms of the deal were not disclosed.
Roku Stock Fundamental Analysis
Because Roku is in growth mode, it has been operating at a loss as it invests in international expansion and its advertising-supported video-on-demand services.
However, on Feb. 18, it posted a surprise profit for the fourth quarter. Roku earned 49 cents a share on sales of $649.9 million in the December quarter. Analysts expected Roku to lose 5 cents a share on sales of $617.7 million. In the year-earlier period, Roku lost 13 cents a share on sales of $411.2 million.
The company’s platform business, mostly advertising, accounted for 73% of revenue in the December quarter. Roku’s hardware unit contributed the remaining 27% of sales.
Also, Roku guided analysts higher for the current quarter. Roku stock jumped 3.2% on the news in the next trading session.
The next catalyst for Roku stock is likely its first-quarter earnings report, due in early May.
Roku Stock Technical Analysis
Roku stock ranks fifth out of 19 stocks in IBD’s Leisure-Movies & Related industry group, according to IBD Stock Checkup. Its IBD Composite Rating is 74 out of 99. The best growth stocks have a Composite Rating of 90 or better. Its industry group ranks No. 76 out of 197 groups that IBD tracks.
After hitting a low of 58.22 in March 2020 during the coronavirus stock market crash, Roku stock trended higher in fits and starts. It went on a tear after its third-quarter report on Nov. 5.
After its third-quarter earnings report, Roku stock pulled back and found support at its 10-week moving average line three times. Those occasions offered alternative buy points, according to IBD trading guidelines.
Roku stock hit a record high of 486.72 on Feb. 16, ahead of the stock market correction. It has fallen recently in the tech stock sell-off. It ended the regular session April 1 at 331.90.
Roku stock has an IBD Relative Strength Rating of 90 out of 99. That means it has outperformed 90% of stocks over the past 12 months. The best growth stocks typically have RS Ratings of at least 80.
Is Roku Stock A Buy?
The fact that Roku isn’t consistently profitable means that the stock isn’t ideal under CAN SLIM trading principles. But it plays in the hot secular growth trend of over-the-top internet television.
So investors should be cautious when it comes to Roku stock.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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