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Is Roku Stock a Buy?

Roku (NASDAQ: ROKU) continues to bolster its influence over the streaming market. A deal to offer exclusive content and a dispute with a tech giant serve as the latest chapters in the company's emerging story. The stock has tripled in the past year, leaving investors to wonder whether they can still find gains in the entertainment stock.

A formidable competitive moat

Rather than serving as a mere streaming hardware manufacturer, Roku saw a future in which streaming would dominate at-home entertainment. The company moved to monetize this opportunity by building an ad-based ecosystem that attracts companies seeking large audiences and content producers seeking distribution for their films and shows.

Image source: Getty Images.

However, Roku has also made some bold moves to advance itself competitively. It gained an initial following by serving as a neutral platform for various streaming services. It also made deals with TV manufacturers to produce Roku-branded televisions. This helped it to become the service of choice among consumers. Roku lays claim to about 30% of global view hours, according to Conviva, staying well ahead of Amazon's Fire TV, which has about 19% as of the first quarter of 2021.

With its strong market position, it abandoned its original neutrality by launching The Roku Channel in 2017. This has served as an additional platform for ads, and with the recent purchase of exclusive rights to Saban Films content, the company will feature more exclusives on its channel.

Roku has also taken a stand against powerful tech companies. In April, Roku and Google-parent Alphabet failed to reach an agreement that would keep the YouTube app on Roku's platform. Roku charged Google with what it calls "anticompetitive requirements" that will bring about the "manipulation of your search results." YouTube countered in a letter to its users saying it offered Roku the same "existing, reasonable terms."

The YouTube app remains on Roku's platform for now, and the two companies may ultimately resolve their differences. Nonetheless, the fact that Roku feels it can say no to Google speaks to its power in the marketplace.

Adding up its financials

Despite its more aggressive moves, the company's financial results point to the success of its overall strategy. In the first quarter of 2021, Roku reported revenue of $574 million, 79% higher than year-ago levels. Highlighting the major shift in Roku's business, just 19% of revenue came from its hardware sales with the remainder generated by its platform. Since Roku limited the increase in its operating expenses to just 28%, it turned a quarterly profit of $76 million, a dramatic improvement from the $55 million loss in the first quarter of 2020.

These results also marked an acceleration from full-year 2020 when revenue grew 58%. Although Roku lost $18 million in 2020, it earned a profit in the third and fourth quarters.

Roku did not release an outlook for full-year 2021. However, if it meets second-quarter expectations for revenue of $610 million to $620 million, growth will remain elevated at 73% (at the midpoint). Also, predictions of net income between $10 million and $20 million would mean a fourth consecutive quarter of profits.

More importantly, investors should focus on the gains that nobody is talking about. Active accounts rose 35% year over year to 54 million, and over the last year, these customers became more valuable to the company. Average revenue per user (ARPU) surged in this latest quarter to $32.14, up 32%.

Given Roku stock's rapid rise, its price-to-sales ratio now stands at 22, up from just 10 this time last year. Reduced interest in indoor entertainment as the pandemic fades in many countries could bring about lots of uncertainty for Roku in the remainder of the year.

Despite the potential for near-term volatility, Roku remains an attractive stock long term. Its moat is only growing bigger, while the market for streaming television rapidly expands.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Roku. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.


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