Three Crucial Details to Consider Before Investing in Roku's Shares
Roku (Roku's stock is up 1.33%) is a company leading the streamed entertainment industry, but its journey has been turbulent for shareholders.
This streaming company has plummeted 84% from its all-time high, which it reached in July 2021. This drastic drop in value could encourage potential investors to consider purchasing shares, but before making any decisions, there are three essential facts about Roku that users should be aware of.
1. Transitioning from hardware
Many investors may already be aware that Roku sells various hardware products, including TVs and streaming players, among other items. These products grant users access to the Roku smart-TV operating system. However, it's crucial to note that in the third quarter (ending Sept. 30), only 14.5% of the company's income came from hardware sales.
The remaining revenue for Roku came from its platform segment, which generates revenue through advertising and streaming services distribution. This shift is a significant improvement, as the platform segment carries a much higher gross margin. In 2017, over half of Roku's sales came from physical devices.
Users can think of Roku as using a razor-and-blades business model. The company intentionally sells hardware at low gross margins, sometimes even at a loss, to gain access to as many households as possible. Once in these households, the focus shifts to monetizing user engagement through subscriptions and advertisements.
2. Riding the Streaming Wave
Over the past decade, technological changes in the media and entertainment industry have drastically altered consumer behavior. The rise of streaming entertainment and the so-called "cord-cutting" trend has been particularly beneficial for Roku, as its business relies on households reducing their traditional cable-TV subscriptions.
According to eMarketer, less than 50% of U.S. households still subscribe to cable-TV services. This number is expected to continue decreasing with each passing year.
Streaming entertainment provides viewers with greater flexibility and convenience and is typically more affordable than traditional cable-TV services. Additionally, it does not require users to commit to long-term contracts.
Roku offers a platform that aggregates various streaming services into one interface, which has contributed to its growth over the years and solidified its position as the leading smart-TV operating system in the U.S.
3. Profitability and Finances
For a company that has been growing rapidly, Roku has not consistently reported positive net income on a GAAP basis. While Roku did report a net income of $242.4 million in 2021, this was an anomaly due to the pandemic's impact on revenue, active accounts, viewership, and monetization.
From the start of 2022 through 2023, Roku reported a cumulative net loss of over $1.2 billion due to the company's ongoing investments in customer acquisition and product development.
However, things may be starting to improve. Through the first nine months of 2024, Roku reported a net loss of $93.8 million, which was a significant improvement from the $631.3 million net loss during the same period in 2023.
"Our business has grown and evolved, and we are now primarily focused on growing Platform revenue and profitability," the Q3 2024 shareholder letter states. However, it's important to note that Roku has yet to consistently generate positive earnings, so potential investors should be aware of the financial risks involved.
Investing in Roku's shares might be tempting with its recent stock increase and potential for future growth, given its dominance in the streaming industry. However, it's worth considering the company's shifting focus from hardware sales to its platform segment, which generates higher margins.
As you delve into the world of finance and investing, it's essential to analyze Roku's financial reports carefully. Despite rapid growth, Roku has not consistently reported positive net income on a GAAP basis. While losses have decreased in recent years, potential investors should be aware of the financial risks involved.
