As the country begins to reopen from the COVID-19 lockdown, the Dow Jones industrial average and the S&P 500 are moving toward their pre-pandemic levels. So why is Roku (NASDAQ: ROKU) languishing in the middle of its 52-week range? It’s complicated.
The digital media company, based in San Jose, California, was well-positioned to thrive as the coronavirus forced people to stay at home. Its television streaming device and services helped meet the increased demand for home entertainment and information.
Even before the pandemic, Roku was the No. 1 platform in the highly competitive U.S. streaming space.
With installations of 35.8 million, Roku leads Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL) in number of streaming connected devices, according to Kagan, the media research group of S&P Global Market Intelligence.
With its platform installed in nearly 1 in 3 smart TVs, Roku was a beneficiary of the growing trend of cable television cord cutting.
Record Number of Streaming Hours
Roku reported that users streamed a record 13.2 billion hours on its platform during the first quarter, up nearly 50% over the same period a year ago. Streaming hours soared by 80% in April as millions of people stayed home.
Roku has also diversified its revenue streams with a free TV channel supported by advertising. It generated an estimated $528.4 million in advertising revenue in 2019, an increase of 82% from 2018, according to research firm eMarketer.
That diversification may be part of the reason that Roku shares have not taken off. Even as more eyes were on streaming platforms, advertisers across all media were cutting or eliminating their ad buys. Now Wall Street is rebounding from its mid-March plunge as states loosen lockdown rules. That reduces the number of hours people spend watching connected TV platforms.
Roku stock is down nearly 25% year to date, faring worse than the S&P 500, which is down by about 4%.
In the first quarter, Roku shattered Wall Street expectations, beating its own forecasts for both revenue and earnings before interest, taxes, depreciation and amortization (EBITDA). Active accounts reached 39.8 million, which was up 37% from the year earlier. Streaming hours, an indication of subscriber engagement, shot up 49% to 13.2 billion.
Revenue for the period reached $321 million. The Roku platform produced revenue of $233 million, and the Roku streaming media service had revenue of $88 million.
Positive Assessment From Analysts
Analysts remain positive on Roku, with a consensus rating of Buy. The media 12-month price target among 19 analysts is $141, with a high estimate of $165 and a low of $60.
Jim Cramer of CNBC says he expects Roku’s share price to be under pressure in the short term because it’s a stay-at-home stock in an era where we’ve suddenly decided we don’t have to stay at home anymore.
Like other American streaming services, Roku has a lot of overseas growth potential. “There are probably 1 billion households around the world that have broadband and they’re all going to switch to streaming,” Roku founder and chief executive Anthony Wood said in last month’s earnings call.
Roku-powered smart TVs are mainly sold in the United States and Canada. But the company has expanded its sales to Mexico, Brazil and Britain. Roku has not said publicly what other international markets it is looking at, but there are huge opportunities.
Its competitors have a head start internationally. Netflix is approaching 200 million subscribers worldwide. Amazon doesn’t disclose subscriber numbers for its Prime membership, which includes a massive streaming library. But analysts estimate the company has nearly 150 million global subscribers.
Newcomer Disney+ (NYSE: DIS) quickly reached the 50-million milestone. The company is looking for rapid growth in such markets as India.
A recent report predicted Disney+ in India will see revenue grow to $902 million by 2025. Only YouTube will generate more income from streaming video in the country, according to Media Partners Asia.
Long-Term Potential in Advertising
Roku also sees long-term potential in advertising, even though that revenue stream contracted in March. As advertisers return to the market, they may re-evaluate where they are spending their money.
“In the short term, the pandemic is slowing the growth of Roku’s video advertising business,” Wood said. “While advertisers are spending less, reduced budgets mean marketers are looking for ways to invest more effectively, and this should accelerate the shift to streaming ad buys.”
As the audience for streaming services grows, the ad revenue is likely to increase as well. A shareholder letter from Roku explained it this way: “Brands are reassessing their entire marketing mix and many are showing a preference for our targeted, more measurable form of advertising as well as the flexible solutions we offer, such as sponsorship and interactive overlays.”