Roku (ROKU 48.25, -10.61, -18.03%) is getting shellacked despite reporting strong
third quarter results.
Roku reported third quarter revenue (+39%), gross profit (+58%), adjusted EBITDA (swung to profit) and net income above guidance.
However, revenue growth slowed to 39% and beat estimates by just ~1% after growing 57%, beating estimates by almost 11%, last quarter. Higher-margin platform revenue grew 74% year/year to $100 mln, down from 96% growth in the second quarter. Management noted that content distribution related revenues, which can be a little lumpier quarter-to-quarter, grew at a similar pace to account growth (+43%). Meanwhile, Q3 video ad sales more than doubled year/year and remain a key contributor.
Gross margin fell 400 basis points sequentially after expanding quarter/quarter in the third quarter last year. Still, gross margin expanded 560 basis points year/year as platform revenue overtook lower margin player revenue.
The company's business model is coming together quite nicely.
Active accounts grew 43% to 23.8 mln with more than half of new accounts coming from Roku TVs. Roku sells low-cost streaming devices and licenses its operating system to TV manufacturers to increase and monetize its installed base via platform revenue.
Growth in user engagement accelerated for the third quarter in a row as streaming hours grew 63% to 6.2 bln, up from 57% growth in the second quarter.
For the third quarter in a row, Roku raised guidance for the year while issuing in-line guidance for the next quarter.
Management has said that they are reinvesting gross profit upside and managing the business at breakeven given the large growth opportunity.
Roku is well positioned to be a big winner in the burgeoning over-the-top (OTT) streaming TV market. Chief Executive Anthony Wood invented the DVR and sold his RealTV business to DirecTV (now part of AT&T) before working at Netflix. He noted that traditional linear pay TV lost 1 mln subscribers during the quarter while Roku added 1.8 mln active accounts.
Still, any blemish for a high growth momentum stock like this can result in swift multiple compression from an unforgiving market.
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