Will Roku’s share price see another double-digit earnings pop?

Roku’s [ROKU] share price rose over 18% after posting stellar first-quarter results on 6 May.

Aug. 3, 2021

This article was originally published on OptoInvest in the Next Big Idea.

Up 29% so far this year (as of 30 July’s close), the maker of digital TV streaming devices has benefitted from the pandemic driving up sales and advertisers spending as much on streaming services as traditional channels.

Still, Roku’s share price has slipped 6.7% over the past month amid choppy trading coming off from a 52-week high of $490.76 on 27 July. Can a strong set of numbers get investors to tune back in?

What could move Roku’s share price post-earnings?

Roku’s fundamentals look strong especially for the advertising vertical. In an interview with AdWeek, Alison Levin, Roku’s VP of ad revenue and marketing solutions, said upfront advertising bookings completed earlier than expected and this is ‘a really clear indicator that marketers are putting streaming first’. For the first time advertisers made up 42% of upfront commitments this year, showing the increased importance of streaming.

The next area of focus is on Roku’s performance balance as a platform and, now, creator. During the second quarter, Roku launched the ad-supported Roku Channel which features licensed content from other media companies and shows licensed to it as part of its acquisition of Quibi’s earlier this year.

Roku debuted its first dozen originals on the channel at the end of July, including the buzzy Demi Lavato show. Any update here will be interesting and investors might want to remember that it was Netflix’s decision to branch into original content that propelled it to the top of the streamers when House of Cards debuted in 2013.

Finally, potential takeover news could move Roku’s share price, although it’s a long shot on whether it’ll come up during the result’s accompanying earnings call. Apparently, Comcast CEO Brian Roberts is mulling a potential bid for Roku, according to a report by Wall Street Journal‘s Lillian Rizzo.

Comcast has come under fire from investors and analysts over lagging in the shift to streaming. Roberts is understood to want to deliver streaming apps into living rooms, in much the same way that it delivered cable TV channels. Rizzo suggested that Comcast is wrestling over whether to develop its own streaming distribution service or buy one (i.e. Roku).

When is Roku reporting Q2 results?

4 August

What does Wall Street expect?

Wall Street is expecting earnings to come in at $0.22 a share, reversing a $0.35 loss seen in the same period last year. Revenue is pegged at $618.54m, up 96.1% from the $315.43m seen last year. Roku itself guided for revenue of between $610m and $620m, with net income expected at between $10m and $20m.  Adjusted EBITDA is expected to come in at between $60m and $70m.

These numbers point to another blockbuster quarter following a sensational first quarter. Revenue last quarter came in at $574m for the quarter, up 79% year-on-year. Platform revenue, including advertising, was $466.5m, up a staggering 101% year-on-year. 

Hitting Wall Street estimates could see Roku’s share price pop this week, with the company having easily topped expectations in the past four quarters. However, subsequent earnings might not see such high growth numbers, something Roku noted in its letter to shareholders last quarter:

“We expect the platform business to have an easy year-over-year comp in Q2 2021, and then progressively more difficult comps as the year progresses,” Roku said in the letter to investors accompanying first-quarter earnings. “This reflects the pullback in TV advertising spend in Q2 2020, triggered by the initial uncertainty surrounding COVID-19, and the subsequent shift of ad budgets in Q3 2020 to digital, and in particular to Roku. We also benefited from the launch of multiple premium DTC services in the second half of 2020.”

Where next?

The pandemic has accelerated Roku’s dominance in US households. Roku has taken a 33% to 39% market share every year since 2015, according to CNBC’s Alex Sherman pointing to data from Parks Associates.  However, Sherman notes competition is heating up, with Roku tying with Amazon Fire TV in the first quarter of this year at 36% apiece. Apple TV also had a 12% share in the first quarter, followed by Google’s Chromecast with a 8% share.

Whether Roku can pull ahead of Amazon [AMZN] will go a long way to determining how much further the share price can go. Something that Moffett Nathanson analysts noted after first-quarter earnings.

“If this were a less competitive market, we would be all in on Roku’s opportunity,” the analysts wrote. “The problem is that longer term, we remain unconvinced that Roku has built a large enough moat to keep competitors out of their business – and that is certainly more true outside the U.S.”

Among the analysts tracking Roku’s share price on Yahoo Finance, the stock has an average $450.50 price target, which would see a 5.2% upside on Friday’s close. Of the 26 analysts offering recommendations in July, 6 rated the stock a Strong Buy and 16 rating.

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