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Roku 1Q Earnings – So Good the Bulls Came out of Hiding

 

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Roku (ROKU) reported earnings after the bell this afternoon that far surpassed Wall Street’s expectations.

The company is one of the few that put up results so good, even the bearish stock market sentiment couldn’t keep the stock down after hours with shares up 9% as we type.

Granted this is only back to where the stock was on Wednesday but it shows that Roku is a force to be reckoned with and not a growth stock fad.


Basic earnings per share for the quarter came in at $0.59, destroying the standard profitability expectations of a loss of $(0.13).

Revenue for the quarter beat estimates by over 17%, coming in at about $574 million; compared to Wall Street average estimate of $492 million.

Operating profit (EBIT) was reported at $75.8 million, far surpassing analyst estimates for a loss of $(18) million. Adding back depreciation and amortization finds that reported EBITDA for the quarter was $85.4 million, almost 3 times higher than what was expected by Wall Street.

EBITDA margins shattered analyst expectations by about 8.5%.

This earnings report is exactly what the company needed to give its shares a boost after being down over 15% year to date.

Driving the profitability beat seems looks to be an increase in the number of advertisements on Roku’s main platform.

Roku’s clientele clearly sought to capitalize on its marketing opportunities in the pandemic era, accounting for a 101% YoY increase in Platform revenue: a new record. As multiple expansion continues to persist in the broad equity market, profitability has increasingly come into the forefront of investors’ minds.

To no surprise given the existence of the Covid-19 pandemic, active Roku TV accounts grew 35% YoY and customers watched over 18.3 billion hours of TV; a YoY increase of 49%.

Guidance Delighted

The company provided forward guidance that seems to comfort investors in the fact that revenue growth is not stopping anytime soon.

Management expects Q2 revenue to be somewhere within the range of $610-620 million, which would reflect a QoQ increase of about 6%.

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More importantly, management expects to continue its net profitability trend next quarter, forecasting net income to sit in the $10-20 million range.

Harping on the implications of the pandemic once more, major content creators and studies have had few distribution channels to showcase their products with movie theatres closed around the country.

Studios have turned to the likes of streaming services like HBO Max and Amazon Prime to showcase big premieres.

Roku notes its confidence in the continuity of this trend and is hopeful that it will continue to benefit by increased amounts of content distribution and advertisements.

From the perspective of relative valuation, Roku’s common equity trades at roughly 17.2 times its estimated revenue for fiscal year 2021, which represents a substantial premium of 75% in relation to its peer group.

Since Roku does not have a history of consistently reporting positive profitability, no conclusions can be drawn from the standpoint of a comparable company analysis in relation to the company’s price-to-earnings ratio.

The company does not mention members of its peer group by name in its annual 10-K filing, so we went ahead and created a rather vast peer group composed of Netflix, Comcast, AT&T, Amazon, and Trade Desk Inc.

In the last year, the company’s share price has appreciated a staggering 121% and caught the attention of Cathie Wood’s Ark Innovation ETF.

Roku remains the ETF’s third-largest holding as of this writing.

However, it became evident that investor appetite for high multiple stocks suddenly turned dormant at the start of the year.

Consequently, Roku’s shares are down almost 14% year to date, but the stock should outperform Netflix and other tech-heavy peers for now with such strong results.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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Categories: Technology
Scott Willis: Scott has over 15 years of institutional investment management experience analyzing both debt and equity securities. He has held senior investment research roles at Credit Suisse, and TD Asset Management. His core areas of investment coverage at Grizzle include marijuana, energy and technology. Scott is a CFA charterholder and has been featured on Bloomberg, CBC, CNBC and Macleans.
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