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Strong Results Mean Roku Stock Should Head Higher

Larry Ramer

It looks like my previous near-term predictions about Roku (NASDAQ:ROKU) the company — and Roku stock — were on the money.

4 Big Reasons Roku Stock Will Continue to Run Toward $130

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In a column published on March 27, I wrote that the company was “likely to benefit from a huge surge in viewership amid the outbreak” of the novel coronavirus. I added that “fears about the company losing ad revenue during the crisis are overdone.”

On April 14, Roku reported that its total streaming hours had surged 49% year-over-year in the first quarter to 13.2 billion. Moreover, the company raised its first-quarter revenue guidance range to between $307 million and $317 million, versus its previous forecast of $300 million to $310 million. The company continues to expect EBITDA, excluding some items, of -$18 million to -$23 million.

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Finally, Roku added a net total of nearly 3 million new accounts in Q1.

Roku’s Revenue Is Likely to Stay Strong

The company’s Q1 results clearly indicate that its viewership is soaring amid the lockdowns, while its financial metrics have not been negatively affected by the mass closures.

I expect the company’s results to continue to be strong going forward. In my previous column, I predicted that Roku would obtain a great deal of revenue from the companies that are booming during the crisis. I also predicted that Roku’s commissions from other TV content providers would surge amid the lockdowns.

With the coronavirus crisis in the U.S. more than a month old, I’m even more convinced that Roku’s financial results will stay strong in Q2. That’s because, for a couple of reasons, the current economic downturn is different from previous recessions.

First, during the current pandemic, many sectors — including healthcare, high tech, television, supermarkets, finance, e-commerce, and government — have either been largely unaffected or helped by the crisis.

Secondly, the income of those who work in the latter sectors tends to be much higher than the compensation of employees in the sectors that have been devastated by the crisis. In other words, Americans who work in the high tech, e-commerce, government and healthcare sectors tend to earn much more than the employees of restaurants, movie theaters, casinos and clothing stores.

As a result, unlike during the 2008 recession, the sectors of the economy that have been allowed to operate can still target many tens of millions of very prosperous, financially secure consumers. And when more segments of the economy reopen, most high-income individuals will be ready and able to spend a great deal of money on more goods and services.


Roku’s Defensive Moves Are Precautionary

Roku stock bears have put much weight on the company’s decisions, announced in conjunction with its preliminary Q1 results, to withdraw its 2020 guidance and draw down $70 million from its credit facilities. But in these uncertain times, those are simply prudent, precautionary moves that don’t mean the company’s performance is deteriorating or will do so in the future.

If the deterioration of the economy suddenly accelerates because of an unexpected and tragic acceleration of coronavirus deaths, Roku wants to have enough money to keeps its operations intact. And if such an event occurs, it also does not want to be accused of misleading investors with overly optimistic 2020 guidance.

But the fact that Roku did not mention any deterioration so far in Q2 likely means that the company’s financial results have not dropped off in April. Further, as I’ve noted previously, there’s a great deal of evidence that the virus spreads very slowly in warm weather. As a result, the likelihood of the number of coronavirus deaths rapidly accelerating is extremely low.

The Bottom Line on Roku Stock

Roku’s preliminary Q1 results show that the company is benefiting from accelerating viewership, while its revenue has been running slightly ahead of expectations.

For a few reasons, those trends will very likely continue going forward.  First, with closures persisting for the rest of this month, tens of millions of Americans will continue turning to streaming video as a source of entertainment.

Secondly, as another InvestorPlace columnist, Luke Lango, pointed out recently, advertisers and advertising revenue follow eyeballs.

Finally, uniquely during this economic downturn, whole sectors have been largely unaffected, and those who work in those sectors tend to earn a great deal of money. As a result, I believe that advertising will be more resilient than during previous downturns.

Meanwhile, with Roku still poised to become the world’s new leading TV provider and Roku stock trading at a price-sales ratio of less than 10, the stock’s valuation remains attractive.

Given all these points, I continue to believe that investors should buy the shares.

As of this writing, Larry Ramer owned shares of Roku stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer.

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