For consumers looking to steer away from the confinements cable television companies, they are turning their attention to streaming video platforms, like ROKU. Investors of Roku's stocks have all sat up and taken notice of what may seem like a golden opportunity to strike while the pan is still hot. Ever since COVID-19's ugly introduction into people's lives that has changed so much of how we access a number of services, streaming movies and television has never been as popular as they are now. Does this mean investing in Roku stock serves as a solid long-term investment? If the trend of consumers who like their visual entertainment, the answer seems to be a yes, for now.
Netflix would known as the California-based company merely started off as an internet alternative to a television network. In 2007, Netflix expanded its business operations to become hardware agnostic and has since grown by leaps and bounds, especially as of early 2020 when the pandemic had people confined to their homes. People like and need to be entertained. If they can't achieve this out in public as they have in the past, they're going to look for alternatives. Netflix is one such alternative, as are Amazon Prime Video, and Hulu. Roku's set-top boxes and streaming sticks enabled customers to access the internet-based networks. This is the same setup that is now licensed as an operating system in smart television units, each of them having agreements and contracts in place by the manufacturers. Roku earns most of its revenue nowadays through the advertisements they place on its platform. This includes commercials for different ad-supported services such as its own self-named channel.
Roku also earns a share of the revenue earned from pay-per-view subscriptions sold by third-party services that have access to its platform. With more consumers switching visual entertainment services away from cable companies in favor of video streaming services, Roku's position and stock value are tied to this shift. For as long as consumers continue to make the switch, Roku and its investors stand to gain. When Roku first saw the trend of consumers favoring free, ad-supported internet networks as a means to manage their entertainment budget, the company recognized the pattern that there are only so many paid subscription video-on-demand services they'd be willing to invest in on a monthly basis before looking for free alternatives. Between Amazon, Hulu, and Netflix, that's a fair chunk of money when it all adds up, and this doesn't include a subscription for sports fans who are likely subscribed to FubuTV or Disney's ESPN. For Roku, offering a free, ad-supported internet video network offers consumers a less expensive means to get the most entertainment value possible without spending any money for it.
Roku's Growing Pains
Analysts from Wall Street observed the trend of households canceling traditional pay for television services in favor of streaming platforms like Roku's. They also saw people who never signed up for pay television services to start with also set their sights on streaming networks, just like Roku's. This has resulted in advertising agencies steering their money to support Roku's platform more and the cable networks less. July 2021 saw this commitment from advertisers double their spending budget with Roku. By the end of the third quarter, there were over fifty-six million active accounts registered to Roku and its streaming service. As impressive as these numbers seem to be, Wall Street analysts felt the 1.3 million increase of user registration from the previous quarter fell short of the expected 1.68 million. The average revenue Roku earns from each user has climbed up to slightly over forty dollars in the third quarter, which is a forty-nine percent increase from what it was during the same quarter of the previous year. The majority of this growth has come from the North American market, mainly among Americans and Canadians. Currently, Roku operates in more than twenty different nations and continues to expand its reach as more nations are signing up to get in on what seems to be as golden an opportunity for them as it is for the investors.
At the moment, Walt Disney's Disney+ and Apple's Apple TV+ have been benefiting Roku as streaming video services to its platform. AT&T's HBO Max, Comcast's Peacock, and ViacomCBS' Paramount+ are also part of this network family. This, combined with Roku's genius reach through smart TV units and streaming gadgets, has made the company a logical partner for several third-party streaming services. The positioning Roku has in the battle among networks to seize dominance of internet-based television sees the company standing to make the most gain out of it as it stands strategically in the middle, like an arms dealer. This is the analysis that was made by Lara Martin from Needham, as presented by Investor's Business Daily. While Roku's free, yet ad-supported video streaming network has seen a surge of new accounts since the start of the COVID-19 pandemic in early 2020, the new viewership increase has since begun to slow down as it seems the worst of the health crisis has come and gone. In order to maintain current viewership levels, as well as continue winning over new customers, the company's Roku Channel has been going to work to bulk up original and exclusive content. At the moment, the channel mostly streams licensed feature films and television programs. In March 2021, Roku managed to bring on board This Old House for $97.8 million. The popular series features home-remodeling footage, along with a number of tips for the do-it-yourself (DIY) viewers who have the monkey-see, monkey-do mentality.
Acquisitions and Expansionism
The defunct streaming service known as Quibi was snatched up by Roku at the start of 2021. Now positioned to offer viewers over seventy-five of Quibi's roster of programming through the Roku Channel as a free, ad-supported service, the company has since rebranded these shows as Roku Originals. In batches, Roku Channel began the shows it now had in its roster after the acquisition of Quibi. The first batch was released in May 2021, which had thirty shows, including Kevin Hart's Die Hart and The Fugitive, starring Kiefer Sutherland. This resulted in a 5.2% spike in Roku's stock, at least according to what was reported by the news at the time. Within the two weeks of these free, ad-supported programs airing on Roku Channel, there was a record viewership on its platform. This triggered another stock jump by 4.6%, at least that is what the news reported in June. Come August 2021, Roku Channel began streaming the second batch of Quibi, now branded Roki Originals, shows that included comedies, competitions shows like Squeaky Clean, and dramas. All the way until mid-2020, Roku had operated at a loss as it was investing into expanding the company's network reach at an international level.
The ad-supported video-on-demand services Roku Channel has been providing has, however, seen the five consecutive quarters of profitability as the advertising business has begun to surge forward. Reported on November 3, 2021, Roku issued a report stating it earned a considerably higher than expected profit for this year's third quarter. However, its sales missed views. The company earned forty-eight cents per share on sales of $680 million in the first period. It was forecasted by analysts Roku's earnings of six cents per share on sales of $683.5 million. From the previous year's period, the company earned $451.7 million, based on nine cents per share. However, the Roku stock dropped by 7.7% upon the next trading session as disappointed investors wondered about Roku's direction. For the fourth quarter, Roku was expected to earn $892.5 million, which are numbers based on the midpoint of the previous quarter's outlook. It was predicted by the analysts an earning of twenty-one cents per share on sales of $946.2 million for Roku in the fourth quarter. Eighty-six percent of Roku's earnings comes from the company's platform business, which is mostly based on advertising. The other fourteen percent comes from the hardware units that have been sold by Roku that are featured in found in smart TVs and gaming consoles.
Riding the Roku Roller Coaster
As of November 2021, Investor's Business Daily reported Roku stocks are ranked twelfth out of twenty-three stocks in its Leisure-Movies & Related industry group. This is considered a subpar performance of forty-eight out of ninety-nine. Ideally, the best growth stocks normally have a composite rating of ninety or higher. When Roku hit a low of 58.22 in March 2020, it was during the timing of the stock market crash as a result of the coronavirus pandemic, COVID-19, which has since forever changed how the world does business. It was a significant drop from the record-setting 486.72 high it had on February 16, 2020. On July 23, 2020, Roku reached a buy point base of 463.09, which then hit a new record high of 490.76 just four days later. Fortunes began to change when the record high reached on July 27th when the Roku stock triggered a stop-loss sell rule once the value fell between seven percent and eight percent below the buy point. On July 30, 2020, the stock hit the range of 426.04 to 430.76. When the stock dropped below its fifty-day moving average line in heavy volume trading, the Roku stock flashed another sell sign, according to the August 5, 2020 earnings report. As of November 12, 2020, the value was reported at 275.38. When it comes to relative strength ratings, at least according to IBD's ratings, Roku sits at a twelve out of ninety-nine. Ideally, the best growth stocks should have a rating of no less than eighty out of ninety-nine.
Roku Stock as a Solid Long Term Investment
According to analysts, Roku stock is not a recommended buy at this time as it needs to form a new base and be in the right market condition before setting up a potential buy point. At the moment, Roku stock has an accumulation/distribution rating of D-minus, which indicates institutional selling of shares. In addition to this less than impressive performance, Roku stock has also been trading far below its fifty-day and two hundred-day moving average lines, which is seen as a negative sign. However, with this being said, Wall Street seems to enjoy how Roku manipulates its movement in the trending growth and secularism that has internet television increasingly taking over an audience who prefers over-the-top productions instead of the yawning effect mainstream cable television programming has been coming out with.
According to Insider Monkey, the fourth quarter saw fifty-seven of the hedge funds it tracks behaved like raging bulls with Roku's stock. This has resulted in a minus seven percent in performance compared to the previous trading quarter. This time last year, it was fifty-nine hedge funds that behaved in the exact same manner. Hedge fund giants such as ARK Investment, Citadel Investment Group, Ogborne Capital, Steadfast Capital Management, and Whale Rock Capital Management are all bullish in behavior in Roku stock, which has resulted in a decline of interest from these hedge fund giants. However, LRT Capital Management, an investment management firm, pointed out Roku stock is currently trading at the lowest value it has seen in years despite the fifty percent revenue growth and eighty percent platform growth. This is not a good sign, especially with the rise of competition among other on-demand video streaming services that are showing more promise in their potential than what Roku is displaying now. At least this is from a short-term investor's point of view.
However, according to Investor Place, it's pointed out now that Roku's stock value is down by over fifty percent from its July 27, 2021 high, now is the time for long-term investors who wish to put in a minimum of three years' worth of investment into NASDAQ:ROKU, now is the time to do it. At the moment, the current situation with Roku shows a golden opportunity for investors who wish to exercise better judgment and patience to get in on something that still shows considerable promise. In truth, the decline of Roku stock value saw two key issues that caused that to happen. The first was the general malaise about innovation and disruption that occurred over the past four months due to the bullish behavior that came from the hedge fund giants. Furthermore, Ark Innovation ETF (NYSEARCA:ARKK) owns Roku and it was their own stock value that went down twenty-one percent during the same period. The second reason was the Roku stock got ahead of itself in July 2021. That, however, was corrected, along with the surprising fifty percent drawdown. For aggressive investors, buying into Roku stock as a half position now is recommended. Put the other half aside to see how the omicron variant of COVID-19 plays itself out. It will likely be a bumpy ride, but the formula is still there for the long-term investment to be a profitable one, but only if the investor opts to stay in it for the long haul and choose an aggressive trading pattern.
Written by Allen Lee
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