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Buy Roku Stock on the Dip Before Q4 Earnings on Streaming TV Growth?

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Roku (ROKU - Free Report) shares have moved sideways for six months and now the streaming TV firm is set to report its Q4 financial results after the closing bell on Thursday. The question is should investors consider buying once-high flying Roku stock amid an ever-expanding streaming TV market?

Recent Roku Worries

Roku stock tumbled after it reported its Q3 earnings results in early November, even though its growth remained strong. Wall Street seemed to focus on slightly lower than expected new active account growth and “disappointing” fourth quarter guidance.

Investors also sold Roku stock in mid-September after Comcast (CMCSA - Free Report) announced that it would give its own streaming TV device to users of its broadband internet service for free.

Roku’s Pitch

Roku is famous for its small devices that plug into TVs that allow users to watch streaming TV content from the likes of Netflix (NFLX - Free Report) and countless others. Despite some of the recent setbacks, Roku’s pitch to Wall Street remains strong as more people drop cable.

For instance, 1.7 million consumers cut the cord just during the third quarter of 2019, which continues to impact the likes of Comcast, AT&T (T - Free Report) , and others.

Overall, roughly 56 million households will have canceled cable or satellite TV subscriptions by 2023, according to eMarketer. And Roku currently sells multiple streaming TV players, which compete against rival offerings from Amazon (AMZN - Free Report) , Google (GOOGL - Free Report) , and Apple (AAPL - Free Report) , that address this growing market.

The company has expanded its reach via smart TVs, which have its operating system built in. Its portfolio of devices helped Roku top the category with 44.2% of viewers, according to eMarketer. This came in well above Amazon Fire TV, Google Chromecast, and Apple TV.

 

 

 

 

 

Wall Street has also turned its focus to Roku’s expanding digital advertising business. The company is able to attract advertisers through its Roku Channel that allows users to watch free streaming movies and TV shows. More importantly, the company sells advertising across its marketplace, enabling marketers to buy targeted ads and more.

Roku’s monetized video ad impressions “again more than doubled YoY” in Q3. The company also completed its purchase of demand-side platform firm Dataxu in November.

The deal is expected to help bolster its ad business, which is set to grow as more advertisers start to spend more heavily across connected TV. “Acquiring Dataxu is a natural progression of our ad tech strategy to offer more buy-side tools and to provide the industry’s best holistic TV plus OTT planning and buying solution that delivers better results for TV buyers,” Roku’s senior VP of Platform Business Scott Rosenberg said in prepared remarks.

Outlook

Last quarter, Roku’s revenue soared 50%. Meanwhile, its ad-heavy platform revenue skyrocketed 79%, which came on top of the year-ago period’s 74% expansion. Investors should note that platform revenue accounted for 69% of total Q3 sales, compared to 58% in Q3 2018.

Meanwhile, the company added 1.7 million accounts to close with 32.3 million, with average revenue per user up 30%. Despite the solid expansion, Roku reported a larger adjusted loss last quarter (-$0.22 vs. -$0.09 in Q3 FY18). Some of the losses can be attributed to its international expansion efforts.

With this in mind, our current Zacks estimates call for Roku’s Q4 revenue to jump 42.3% to $392.4 million. Overall, its full-year fiscal 2019 sales are projected to climb over 49% to $1.11 billion, with 2020 expected to come in another 41% higher at $1.56 billion.

Investors should note that these growth estimates look strong compared to 2018 and 2017. The firm’s full-year 2018 sales jumped 45%, with 2017 up 29% at $513 million (Roku went public in 2017).

The company’s bottom-line is expected to continue its decline, with its adjusted Q4 earnings projected to fall from +$0.05 in the year-ago period to a loss of -$0.14 per share. Meanwhile, its adjusted full-year EPS figure is expected to sink from -$0.08 to -$0.53 per share. Roku’s 2020 earnings are then expected to come in nearly flat at -$0.54.

Bottom Line

Roku stock is still up over 200% in the last two years and 460% since its September 2017 IPO. Thanks to its recent downturn, Roku shares closed regular trading Monday at $132.21. This marked a roughly 20% discount against their 52-week highs, which might give it room to run if it is able to impress investors Thursday.

Roku is currently a Zacks Rank #3 (Hold) that can be viewed as a larger bet on the expansion of streaming TV. And the addition of newcomers such as Disney+ (DIS - Free Report) only help Roku. The company has also crushed our quarterly earnings estimate by an average of 75% in the trailing four quarters.

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