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Roku Stock Is Up More Than 100% This Year. Is It Still a Buy?
Shares of Roku (ROKU 7.43%) recently surged more than 30% in response to a second-quarter earnings report the company announced after the market closed on Thursday, July 27.
The recent rally drove Roku's year-to-date return up to an eye-popping 120% last week, and plenty of investors want to know if it has more fuel in the tank.
Is Roku still a good growth stock to buy? Let's look at the recent results that pushed it higher to find out.
Why Roku stock jumped last week
The average Wall Street analyst following Roku expected a loss of $1.26 per share during the second quarter. The reported net loss of just $0.76 per share forced at least eight investment banks to adjust their price targets upward.
Analysts were particularly encouraged by operating expenses that contracted significantly to $504 million, from $550 million in the previous quarter.
Reasons to buy Roku now and hold it for the long run
The Roku OS is the only operating system built specifically for connected televisions. Consumers appear to prefer it to the operating systems that television manufacturers have adapted from Android, Alphabet's smartphone operating system. For several years now, Roku has been able to boast that it's the most-watched streaming platform by total viewing time.
Roku's lead is likely to be widening. Over the past 12 months, the number of viewers on the platform increased 16% year over year to 73.5 million. All those viewers streamed 25.1 billion hours of content and advertisements from the Roku OS in the second quarter. That was 25% more than they streamed in the previous-year period.
Roku's in the lead because consumers use it to aggregate their favorite paid streaming services, such as Netflix, plus a seemingly endless array of free, ad-supported channels.
Roku's OS includes a proprietary billing platform for one-time purchases and subscriptions. Netflix no longer allows new subscribers to pay through Roku, but plenty of smaller streaming services still use its billing platform. When they do, Roku retains 20% of net revenue.
Of course, non-transactional channels adore Roku because it makes monetization with video advertisements a breeze. Advertisers have tightened their belts this year, but Roku was still able to report $40.67 in annual revenue per user during the second quarter. That's 63% more than it reported three years earlier.
In its second-quarter earnings report, we learned that Roku's own channel could be a significant advantage that allows the Roku OS to retain its popularity. Nielsen reported for the first time that The Roku Channel was responsible for 1.1% of total U.S. TV viewing in May.
Individual investor looking at a device while talking on the phone.
A reason to remain cautious for now
If you rely on late-night comedy to smooth out the rough edges you collect by paying attention to the news all day, you're already painfully aware that the ongoing Writers Guild of America strike has crippled the production of scripted television and movies since May 2.
The Screen Actors Guild strike that began a couple of weeks ago marked the first time that actors and writers have walked out simultaneously since 1960. This is an unprecedented situation, but I think we can reasonably expect millions of subscribers to quit their paid services once they stop publishing new seasons of the original content that attracted them in the first place.
As an aggregator of both free and paid streaming services, Roku probably has less to lose than do Netflix and Disney. That said, the ongoing strikes could significantly curtail growth over the next couple of years, even if they end tomorrow. Media and entertainment promotion is a big part of Roku's revenue stream, but soon there won't be any new scripted content from the U.S. left to promote.
A 21-year-old technology business with more than 70 million customers who average nearly an hour a day on its platform should be able to earn some money. Instead, Roku's operation lost a stunning $735 million over the past 12 months. An upcoming lack of new content to promote isn't going to make the next couple of years any easier, either.
Roku would be a very risky stock to buy even if Hollywood wasn't closed for business right now. Investors cheered its second-quarter report because, in addition to strong growth in terms of viewers and streaming hours, Roku reduced operating expenses by 8% over the previous quarter.
Roku's recent expense reductions are steps in the right direction, but it has to take several more before I'd consider buying the stock. Before letting me dissuade you, though, you should know that many of my colleagues are keen to let Roku continue racking up losses in return for a larger share of the streaming market. If you don't have their extremely high tolerance for risk, though, it's probably best to keep this one on a watchlist until it learns how to make ends meet.