Roku’s earnings report has caused a surge in the company’s stock, increasing it by 30%. However, there is one concern that looms over the otherwise positive news. The media-streaming platform had an impressive earnings report, surpassing management’s guidance targets and exceeding Wall Street’s estimates. As a result, investors experienced a significant gain of 31.4% in a single day.
Taking a closer look at the business results and management commentary, there are three strong reasons to consider investing more in Roku. However, no earnings report is flawless, and there is one issue that stands out as a potential game-changer. To determine whether the upsides outweigh the downside, it is essential to evaluate the factors at play and make an informed decision regarding one’s investment portfolio.
One of the reasons to consider buying Roku shares is the strength of its ad sales, particularly in two sectors. Consumer packaged goods (CPG), including a sponsored section featuring McDonald’s on the Roku City screensaver, has proven to be a high-margin area of operation for Roku. This, coupled with growing ad sales related to health and wellness products, suggests that Roku’s partnership with Shopify in the shoppable ads market could be fruitful. Early adopters of this service include Unilever’s Olly brand and the rowing machine maker Ergatta.
Another positive aspect of Roku’s performance is its Roku Channel, which has become a significant platform for new content, accounting for 3% of consumers’ streaming TV time in the second quarter. Viewer engagement on the Roku Channel is comparable to established streaming services like Warner Bros. Discovery’s MAX and Comcast’s Peacock. Additionally, Roku’s branded line of smart TVs, exclusively sold at Best Buy, has been successful in generating sales and winning awards. While these TVs are not Roku’s main business, they serve as a gateway to the company’s primary products and contribute to its growth.
Roku’s global market reach is expanding as it enters South America and Western Europe, offering further opportunities for organic business growth. In the second quarter, Roku gained 1.9 million net new active accounts, representing a 16% increase compared to the previous year. Additionally, streaming hours rose by 21%, reaching 25.1 billion hours. By continuously adding users and increasing engagement, Roku is building a loyal user base, which lays the foundation for long-term success.
Despite these positive factors, there is a concerning issue that cannot be ignored – the media and entertainment (M&E) sector. Traditionally, M&E is Roku’s largest advertising sector, as many advertisers offer services directly through the Roku platform. However, the M&E sector is currently experiencing challenges due to ongoing strikes among Hollywood’s unions for writers and actors. This could hinder the sector’s recovery, posing a significant concern for Roku’s performance.
In summary, while Roku’s earnings report led to an exciting price jump of 30%, the stock price has merely returned to its position from a year ago, with a modest 2% increase in 52 weeks. This suggests that there is still potential for investment in Roku. Despite the concerns surrounding the M&E sector, the company’s positive performance and various growth drivers provide reasons for optimism.
