Top Picks 2018: Roku (ROKU)

01/05/2018 5:00 am EST

Focus: TECHNOLOGY

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Roku (ROKU) is a direct play on the cord-cutting and TV streaming movement. It makes over-the-top (OTT) TV streaming devices that allow people to access apps such as Netflix (NFLX), Amazon (AMZN) and Hulu, notes Mike Cintolo, editor of Cabot Top Ten Trader.

It also developed an operating system that accesses the same apps, and which comes pre-installed on many smart TVs, including models from Hitachi, Insignia, TCL, Sharp, RCA, Hisense and Philips.

The stock is moving higher because Q3 results topped estimates by a mile. Revenue was up 40%, while EPS of -$0.10 beat by $0.19. The results also showed the power of Roku’s business model.

The company is pulling in tons of users by selling streaming devices and TVs (73% of total revenue and 33% of gross profit) at relatively little profit, then cashing in once they are users of the company’s platform by selling advertising, content distribution services and audience data (27% of total revenue and 67% of gross profit).

The best evidence of this phenomenon is that active accounts were up 48% to 11.3 million in the third quarter, while average revenue per user was up 37% to $12.68.

It’s a potentially monster story given that Roku benefits from general acceptance of TV streaming and the mega-movement toward dumping expensive cable packages, and isn’t tied to one particular service. Analysts expect 2018 revenue growth to hit 30%, while red ink will likely be slashed from -$1.80 in 2017 to -$0.43 in 2018.

Yes, there’s competition, and the stock is extraordinarily volatile. But if management continues to make the right moves, the potential is huge as millions more users use its platform.

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