For Immediate Release
Chicago, IL – May 16, 2019 – Zacks Equity Research Roku ROKU as the Bull of the Day, World Wrestling Entertainment WWE as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Cisco Systems CSCO and Jack in the Box JACK.
Here is a synopsis of all four stocks:
Bull of the Day:
In 2007, streaming giant Netflixmade the decision not to produce the hardware for a video and audio player device and instead invested $6M in a spinoff named Roku that was already producing hardware for streaming entertainment options over the internet.
Netflix cashed out just two years later for a small gain, and by 2017, Roku had a wide range of consumer products, a dedicated advertising product for businesses and over $500M in annual revenues. The company went public in September of that year at $14/share, implying a valuation of $1.3 billion.
Thanks to huge revenue growth across all segments, Roku is now has a market capitalization of nearly $10B and increased optimism about revenue and earnings forecasts going forward make it a Zacks Rank #1 (Strong Buy).
The engine for that revenue growth is the sale of advertising. Taking a page from Apple’splaybook, the Roku business model is the creation of a “sticky” ecosystem in which customers purchase a device and then the ownership of that device encourages the customer to continue to make more purchases – often of higher margin products.
Roku makes a decent margin on stand-alone hardware that turns a TV or Computer into a streaming media device and they also license their operating system to manufacturers of smart TVs to be included in those products, but once a customer purchases one of those items, they’re unlikely to buy more hardware anytime soon.
Roku intentionally took a platform-agnostic approach and it’s systems can be used with the equipment of almost any manufacturer. This has made Roku ubiquitous in the content-aggregation market, growing the number of active users of the platform more than 40% over just the past year and the number of hours of programming viewed by 75%.
This gives Roku the opportunity to offer advertisers access to highly targeted audiences, maximizing their ad spending by having their ads shown to potential customers who have already shown some interest in the goods or services being offered - as evidenced by their entertainment choices.
Just as print advertising has been decimated by technology over the past few decades, broadcast advertising is largely being replaced by targeted digital ads on streaming services. Digital ad spending has been increasing at better than 20%/year lately and Roku promises advertisers dramatically higher rates of customer purchasing intent than broadcast ads.
In their most recent quarterly report, Roku reported gross revenues of $207 million, nearly 10% higher than analyst expectations. The increased revenues came primarily from what the company calls “platform revenue,” which is mostly advertising fees and Roku’s gatekeeper-like cut of third party sales through the platform.
The difference in gross margins is dramatic. Hardware sales net Roku approximately a 10% profit margin – which is pretty typical for the industry. Platform revenue earns close to 70% in gross margin, and because many of the costs are fixed, those margins increase as sales increase. The more ads Roku sells, the more they net from each ad.
Net earnings were also better than expected with Roku posing a loss of ($0.09)/share, much narrower than the expectations of a ($0.24)/share loss. Roku management also raised revenue guidance for the full year to a range of $1.03B to $1.05B, more than double the previous year.
Though the company has still yet to turn a net profit, analyst estimates for losses have been shrinking lately with 5 upward revisions since the last earnings report.
The beauty of the Roku business is that is has virtually unlimited scale. Unlike devices which can only be produced and sold in finite numbers, the revenue potential of aggregating content and selling advertising is basically infinite.
It’s that sort of scalability that makes Roku such an exciting opportunity. There’s no reason they can’t keep growing revenues at the same torrid pace well into the future.
Bear of the Day:
The entertainment industry can be a tough place to do business. Fickle consumer tastes and a constant flow of newer, more interesting competition mean that a company can be on top of the world one minute and struggling the next.
That’s what has been happening lately to World Wrestling Entertainment, the vast entertainment conglomerate that started with choreographed faux-wrestling matches, but has also expanded to adjacent businesses like video games, action figures and other promotional merchandise.
Though the WWE grew over decades from the creation of boxing promotors who were putting on legitimate athletic contests for paying audiences at venues like New York’s Madison Square Garden, the present company started to experience widespread success as the competitions became more like theatrical acrobatic exhibitions and the performers took on “good-guy” and “bad-guy” stage personalities, forming alliances and rivalries, almost like a soap opera.
The company that would eventually become WWE was founded by Vince McMahon in 1980. McMahon masterminded the evolution of business and still serves as Chairman and CEO of the company as well as owning approximately 37% of outstanding shares. That stake was even larger until recently as the CEO sold roughly $270 million worth of shares from his own personal account in March.
McMahon almost singlehandedly invented the variety of entertainment content and merchandise that WWE sells and he successfully shepherded the organization through a drug scandal, athlete injuries and deaths and numerous lawsuits about brand identities and trademark infringement and enforcement.
A recent quarterly earnings report highlights the competitive pressures facing the company.
Revenues of $182M fell well short of the Zacks Consensus Estimate of $199M. Those lower revenues were due to disappointing sales of both merchandise and tickets to live events.
Net earnings were an ($0.11)/share loss for the quarter. Expectations had been for a loss of only ($0.02).
Even as revenues fell, the company continued to spend heavily on new initiatives and marketing. Operating expense increased from $120M to $135M, marketing and selling expense grew from $20M to $23M, and general and administrative expense rose from $20M to $24M.
The sparse and disappointing report contained little commentary about what went wrong during the quarter and only a vague notion of the company’s plans to bring back lost revenues and rein in costs.
Though management confirmed full year revenue guidance for 2019 of $1B, investors punished the shares for the apparent lack of fiscal discipline and WWE now trades almost 20% below the all-time highs reached just before the April 24th report.
Several downward revisions in the wake of the report now have the Zacks Consensus Earnings estimate at $1.05/share, down from $1.24/share recently, earning WWE a Zacks Rank #5 (Strong Sell).
WWE still has a devoted fan base who fill stadiums, buy t-shirts and subscribe to pay-per-view events, but a combination of insider sales, slipping revenues and rising costs are a terrible combination.
Cisco (CSCO) Beats in Q3, Raises Guidance
IT giant Cisco Systems, the Silicon Valley-based $250 billion market-cap giant, outperformed expectations on both top and bottom lines in its fiscal Q3 after the close on Wednesday. Earnings of 78 cents per share topped estimates by a penny, up 18% from year-ago earnings, on revenues of $13 billion that surpassed the Zacks consensus $12.88 billion.
Beating on the bottom line is nothing new for Cisco; the company has not come up short on earnings estimates since Zacks recalibrated stock-based compensation (Q2 2015). But guidance was also hiked for Q4 revenues -- to a range of +4.5%-6.5% -- as well as earnings: 80-82 cents per share; the Zacks estimate had been 80 cents. Gross margin guidance also bumped up from previous expectations. Shares are trading up 3% following the positive earnings results.
Jack in the Box also surpassed expectations on its bottom line in its fiscal Q2, to 96 cents per share from the expected 93 cents. Revenues, however, came up shy of the Zacks consensus: $215.7 million versus the $217.4 million we had been expecting. JACK has now beaten bottom-line estimates in 3 of the last 5 quarters. Guidance for full-year 2019 calls for same-store sales to be flat to +1%. Shares are trading modestly higher in late trading, but are still down year to date.
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