Roku Inc (NASDAQ:ROKU) might be the most interesting stock in the tech sector today. Shares of the streaming content platform player are getting shredded following Q3 numbers yesterday afternoon. You’d think it was a bad report.
However, the company put up some pretty solid numbers, including strong growth in third quarter revenue (+39%), gross profit (+58%), adjusted EBITDA (swung to profit), and net income (which came in well above guidance). So, where’s the hiccup?
Roku Inc (NASDAQ:ROKU) shares were clearly hearing whispers on the topline that included some concept of accelerating sales growth. But the 39% jump, while above estimates, was a major downshift from the second derivative trend established with last quarter’s 57% jump. That was 11% above analyst estimates, whereas this time around, the company came in just 1% above expectations.
Upside Down
If there is a reason to look at this as an opportunity, it’s in how that topline can be divided up. The platform side for ROKU is the higher-margin side. And we still saw 74% growth there. Think about that number for a sec. That takes platform up above the $100M mark.
If you listened to the call, then you heard management at ROKU point out that the content distribution side of the business is less predictable (that’s really what “lumpy” means here). But it was up with overall account growth at around 43% (which doesn’t seem that unpredictable).
If there is a story here that bears may be looking for (and there are plenty of them, with the stock always between 15-25% net short of float), it is the sense of possible inflection in terms of the low hanging fruit. The company did not raise Q4 guidance, and it also saw a drop in sequential q/q gross margin. That could mean every new unit of growth is costing more to acquire, and if that unit growth is slowing on a second-derivative basis, then the curve is shifting.
However, we would caution shorts that this may be reaching a bit. Market history is full of margin calls on shortside exposure when a company like this posts a strong quarter after head-faking toward an inflection just like this.
Year/year gross margin jumped 560 bips with this report, and the company raised guidance for the coming year. And how many people do you know right now who use this product?
A good example of that type of inflection is in the iPhone. Everyone already owns one, and they are keeping the older models around longer. So margins are dropping for Apple. And we noted we expect an “evolutionary” response into cloud services.
But that’s likely not at all the same story for ROKU. Careful with those shorts into the hole. Roku has a market value just over $5 billion and trades at ~7x sales or ~5x next year’s sales. We have commonly seen 10x sales in similar names.
Finally, we also saw growth in user engagement accelerate for the third quarter in a row (streaming hours grew 63% to 6.2 billion, up from 57% growth in the second quarter).
Right now, this set of circumstances is being viewed as a “stumble”. But it has every chance of being looked at as an opportunity with the benefit of hindsight a quarter from now. The stock is gap-filling the August rip and nearing a test of its 200-day MA today. It might be worth a close look.