Despite Heavy Blows, Roku Is More Than Ready To Lift-Off Again

The story of a hero that September did no justice

September brought the worst weekly performance for Roku Inc. ROKU since its 2017 IPO. The company lost 40 percent lost its value supposedly because its competition was intensifying. The truth is that stock prices declined because investors panicked for the wrong reason. They didn't truly understand what the company does and were scared off by competitors. And an analyst report with a hyperbolic title "Is Roku Broku?" surely didn't help.

What does Roku do?

The company has two operating segments. The Player is thought to drive key revenue through sales of players and accessories through retailers, distributors and directly to customers. But the Platform unit is what accounted for two-thirds of the company's revenues in the most recent quarter, surging 85 percent comparing to previous year, whereas the player segment jumped 24 percent. This "ad-sales" segment consists of fees received from advertisers, content publishers and from licensing the company's proprietary technology and system to other operators. So, Roku's model is streaming free movies and TV shows by using an ad-supported model. At the start of the year, the company expanded its popular Roku Channel to also include premium content.

Roku now has more than 30 million active subscribers and is far less reliant on sales of its actual devices than one might think. Its success secret lies in advertising revenue. And while Apple Inc. AAPL, Walt Disney Co DIS, HBO parent AT&T T and others are launching subscription services, Roku may still be able to benefit from this trend and that is what many failed to see.

Friend or foe?

Streaming has become quite the competitive business over the past few months as more and more companies are transition into this segment.  Roku's stock lost a third of its value since Apple unveiled its streaming service. But, it seems the market forgot that their content is also available on the Roku platform. So, their growth is growth for Roku as the company expects to benefit from the abundance of streaming services being launched by, i.e. Disney and Comcasts' NBCUniversal CMCSA.

Roku is even friends with Walmart Inc WMT as it launched a new version of its affordable Roku Express exclusively for their stores. Facebook Inc. FB was also wrongly interpreted as a dangerous competitor but despite approaching Disney and Netflix Inc. NFLX, what Facebook aims to launch is a video chat device (video calls on tv), so it's not really a direct competitor.

And this is why many analysts kept their high buy ratings despite the recent drop. They see the massive growth potential of Roku.

The outlook

Roku's stock went up 250 percent this year. Some analysts believe it also means it has plenty more room to fall, not expecting it to be profitable, both this year and in 2020. But Wall Street also thinks that investors overreacted to the fears of intensified competition and find that consumers will remain loyal to Roku. After all, it successfully had to compete with a giant itself, Amazon.com, Inc. AMZN, to become the market leader in North America. Roku has surpassed analyst expectation with each of its earnings reports. In August, it continued showing strong growth in advertising, increasing its number of users by 39 percent comparing to the same quarter last year. As a result, the share price jumped 20.8 percent. So, Roku can surely lift off despite the drop that was mostly caused by lack of knowledge that triggered all that fear in the first place. And let's not forget, the company also announced it is further expanding into Europe.

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