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: User Growth Slows
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. At the same time, companies are shifting their advertising budgets to streaming from traditional TV.
On July 12, Roku revealed that it received double the spending commitments from advertisers during this year’s upfront ad sales.
Roku ended the second quarter with 55.1 million active user accounts, up 1.5 million from the prior quarter. However, analysts had expected 2.1 million new user accounts.
Average revenue per user climbed to $36.46 in the second quarter, up 46% 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. On Sept. 5, Roku announced plans to do business in Germany later this year.
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‘ (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 saw its usage surge as people stayed home during the Covid-19 pandemic, beginning in early 2020. But viewership recently has fallen as the health crisis wanes. Roku users streamed 17.4 billion hours of content in the second quarter, down 5% from the first quarter.
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” for $97.8 million.
In January, 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.
Roku began streaming the former Quibi shows, rebranded Roku Originals, on May 20. The first batch of 30 shows includes “Die Hart” starring Kevin Hart, “Chrissy’s Court” starring Chrissy Teigen and “The Fugitive” starring Kiefer Sutherland.
On June 18, Roku said the former Quibi shows drove record usage of its ad-supported Roku Channel in their first two weeks on the platform. Roku stock jumped 4.6% on the news.
On Aug. 13, Roku started streaming a second batch of 23 former Quibi shows. They include the comedy “Mapleworth Murders,” drama “Survive” and competition show “Squeaky Clean.”
Roku Stock Fundamental Analysis
Until mid-2020, Roku had been operating at a loss as it invested in international expansion and its advertising-supported video-on-demand services. But Roku has posted four consecutive quarters of profitability as its ad business takes off.
Late on Aug. 4, Roku reported much better-than-expected financial results for the second quarter. Roku earned 52 cents a share on sales of $645.1 million in the period. Analysts had forecast Roku earnings of 13 cents a share on sales of $618.8 million, according to FactSet. In the year-earlier period, Roku lost 35 cents a share on sales of $356.1 million.
But Roku stock dropped 4% the next trading session as investors mulled its disappointing new user number.
The company’s platform business, mostly advertising, accounted for 83% of revenue in the June quarter. Roku’s hardware unit contributed the remaining 17% of sales.
Also, Roku guided analysts higher for the current quarter. The next catalyst for Roku stock could be its third-quarter earnings report, due in late October or early November.
Roku Stock Technical Analysis
Meanwhile, Roku stock ranks fifth out of 22 stocks in IBD’s Leisure-Movies & Related industry group, according to IBD Stock Checkup. Its IBD Composite Rating is a middling 58 out of 99. The best growth stocks have a Composite Rating of 90 or better.
Also, its industry group is a laggard, ranked No. 140 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 reached a then-record high of 486.72 on Feb. 16, ahead of the stock market correction.
Roku stock flashed another sell sign when it dropped below its 50-day moving average line in heavy volume trading on Aug. 5 following its earnings report. It ended the regular session Sept. 14 at 316.76.
Roku has an IBD Relative Strength Rating of 70 out of 99. The best growth stocks typically have RS Ratings of at least 80.
Is Roku Stock A Buy?
Roku stock is not a buy right now. It needs to form a new base in the right market conditions before setting a potential buy point. Check out IBD’s Big Picture column for the current market direction.
Further, Roku stock has an IBD Accumulation/Distribution Rating of D-, indicating institutional selling of shares.
It also is trading well below its 50-day and 200-day moving average lines, a negative sign.
Wall Street likes that Roku plays in the hot secular growth trend of over-the-top internet television. But the industry segment is currently out of favor with investors.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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