The streaming TV market is flourishing as media companies rush to follow the lead set by Netflix (NFLX) and go direct-to-consumer.
Two companies that are successfully taking advantage of this secular shift are seeing a sharp divergence in trading action following their respective earnings today. Both Roku (ROKU +27%) and The Trade Desk (TTD -12%) reported strong first quarter results, but ROKU is surging to new highs while TTD is taking a beating, seeing significant profit-taking.
The Trade Desk is getting crushed today despite reporting strong first quarter results and raising guidance for fiscal 2019. First quarter revenue grew 41% on top of 61% growth last year, slowing from 56% in the fourth quarter. The company exceeded estimates on the top line by only 3% versus a 9% beat last quarter. First quarter EBITDA exceeded the company's forecast, but operating expenses grew 51%, which may be contributing to some selling pressure. That said, the company is focused almost entirely on top-line growth. Chief Executive Jeff Green said he would rather reinvest to grow the business than report profits. The Trade Desk is fortunate to have SaaS industry-leading margins, but management is all about taking market share in an advertising market that is approaching $1 trln.
Second quarter revenue guidance was barely above estimates, calling for 38% growth. The Trade Desk also raised revenue guidance for the year to at least $645 mln (35% growth), in-line with consensus, and above prior guidance of at least $637 mln. Wall Street analysts have caught on to the company's conservative forecasts.
Chief Executive Jeff Green said that The Trade Desk was better positioned than any company to capture market share in the digital ad market going forward. Connected TV spend grew 3x yr/yr; audio spend grew 270%. Cross device spend grew 300%, and data spend, which helps advertisers more accurately target consumers, grew 80%. The connected TV market is TTD's biggest opportunity.
The company's independence, transparency, and objectivity are competitive advantages being validated in the market as a compelling alternative for large advertisers to the "walled gardens" of Facebook and YouTube, i.e. the Facebook (FB) and Google (GOOG/L) duopoly.
What's more, The Trade Desk offers advertisers to ability to reach consumers in China. Th ad-tech firm is partnered with Baidu (BIDU), Alibaba's (BABA) Yoku and Tencent (TCEHY), but the China business won't be material for some time.
On the call, Mr. Green said that Google giving consumers the choice to block third party cookies on its market-leading Chrome web browser is a net positive for consumers, the industry, and The Trade Desk.
Meanwhile, TTD's unified ID solution is becoming a common currency for the internet as all the major ad-tech players have adopted the company's approach to improve the digital advertising ecosystem.
Stepping back, The Trade Desk remains the best place to target consumers across channels on the internet.
The stock was susceptible to a pullback, trading with a premium valuation of ~15x sales estimates coming into today. The 12% decline today isn't quite shocking given that it had risen 350% over the last year.
On the other hand, shares of Roku are surging to new highs after the company beat estimates and raised guidance. Roku has established itself as the leading smart television operating system. Licensing its software to TV manufacturers continues to increase its presence in living rooms while its low-cost streaming devices further increase penetration.
Revenue grew 51% on top of 37% growth last year. Gross margin expanded 260 bps to 48.8% as higher margin platform revenue consisting mostly of advertising grew 79%.
The pay TV industry lost over 1 mln subscribers in the first quarter. Over the same period, Roku added 2 mln streaming accounts, growing to 29.1 mln. Streaming on Roku increased a whopping 22% sequentially and 74% yr/yr to 8.9 bln hours.
Just like The Trade Desk, Roku is focused on the growing the top line as the shift to streaming TV from linear TV is still in its early stages. Roku is managing the business to EBITDA break-even.
With a market value of just over $9 bln, the stock trades at ~9x sales estimates, which is comparable to social media companies like Twitter (TWTR) and Snap (SNAP) with similar advertising business models.