Roku ROKU has been one of the most explosive stocks of the year, up a whopping 374% in 2019. Investors have been flocking to the stock because of the potential it has to dominate the streaming services market.
The stock’s astonishing surge in 2019 has Wall Street wondering if Roku can thrive in a market where ecommerce giant Amazon AMZN has amped up their efforts to monetize their Fire TV service. Investors are also looking for alternatives as the market saturates with competitors. Let’s take a closer look at Roku and the company’s outlook.
What Makes Them Different
Wall Street has been quick to compare Roku to Netflix NFLX because they both offer similar services and experienced similar trajectories in their stock. Despite their similarities, Netflix seems more vulnerable to the budding competition. Roku offers a variety of streaming services on a platform that allows for targeted advertising. They do not charge subscriptions or spend copious amounts of income on content like Netflix, but it does negotiate revenue sharing agreements with the streaming services it offers. Roku does, although, face competition from Amazon’s Fire TV, who recently announced a deal to allow third-party ad companies to sell ads on their service.
Netflix finds itself competing for subscribers against other streaming services like Hulu and soon to be Disney’s DIS new service Disney+ and Apple’s AAPL Apple TV+. The streaming service market is not what it once was when Netflix was in its infancy. With new players entering the scene, speculations have circulated if Netflix can continue its dominance in the market. Disney is offering a bundle of its new service Disney+ with Hulu and ESPN+ for a price similar to a standard Netflix plan. This emerging competition between streaming services could bring a boom to Roku, who analysts describe as an “arms dealer.”
Q2 Performance and Company Outlook
Many analysts feel Roku is poised to take a large piece of the over $70 billion US TV ad market. Roku’s second quarter results showcased the company’s ability to withstand competitive pressure and thrive.
The company reported Q2 EPS of a loss of $0.08, crushing our estimate by over 63%; revenue of $250.1 million jumped 59% Y/Y to beat our estimate by 11.28%. Roku reported that they reached 30.5 million active users in Q2, increasing 39% from the year ago quarter and added 1.4 million more from Q1 2019. Average revenue per user grew to $21.06 from $19.06 in the first quarter of the year. Roku attributed their surging revenue to growth in advertising as their monetized video ad impressions more than doubled Y/Y. Additionally, total streaming hours skyrocketed 72% in Q2, and fueled platform and player revenue to rise 86% and 24%, respectively. Roku shares soared over 21% shortly after their earnings report.
The company lifted its full-year outlook as a result, with the midpoint of its new 2019 revenue forecast range at $1.085 billion, up from a previous midpoint of $1.04 billion. William Blair analysts are very optimistic about Roku’s future; they believe the company will reach 80 million active accounts by 2025 and generate $4.5 billion in revenue, 89% of which will be domestic. That would bring average revenue per user to $58 in 2025, implying an annual growth rate of 16% from 2019 to 2025.
Our Q3 consensus estimates are predicting that Roku will make a 47.6% jump in revenue to $255.9 million, but earnings will plunge 233.33% to a $0.30 loss per share. We are anticipating for Roku subscribers to grow 39.8% to 33.3 million, 2.78 million more than Q2, and for average revenue per user to spike to $22.02. Platform and player revenue are forecasted to soar 73% and 14.9%, respectively.
Roku sports a Zacks Rank #3 (Hold) and has everyone talking about the remarkable run it has been on in 2019. With market saturation threatening the likes of Netflix, investors are looking for a possible alternative service or platform that can take their portfolio to the next level.
Roku seems poised to continue its company’s growth and would benefit from an influx of streaming services entering the market. Roku is focused on being the successor to modern day cable television, and if it can successfully obtain a large part of the market, then shareholders can expect the company’s marvelous run to continue.
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