Roku(NASDAQ: ROKU) is a business at the forefront of streaming entertainment. However, it has taken shareholders on an incredibly volatile journey.
This streaming stock trades 84% off its all-time high, a mark set in July 2021. This huge dip might prompt investors to buy shares. But before doing so, here are three must-know facts about Roku you can't miss.
1. Moving away from hardware
Investors are probably familiar with the fact that Roku sells various hardware devices, like TVs and streaming players, among other things. These basically give people access to the Roku smart-TV operating system. However, it's worth pointing out that in the third quarter (ended Sept. 30), just 14.5% of the company's revenue came from hardware sales.
The rest of Roku's revenue was derived from its platform segment, which makes money from advertising and streaming services distribution. This isn't how it used to be, though. About seven years ago, in 2017, more than half of sales came from physical devices. The benefit of this shift is that the platform segment carries a significantly higher gross margin.
Investors can think of Roku as being similar to a razor-and-blades model. Hardware devices are sold intentionally at low gross margins, even at a loss at times, with the main goal being to get Roku into as many households as possible. Then, the focus shifts to monetizing user engagement via subscriptions and advertisements.
2. Riding the streaming trend
In the past decade, there have been few ways that technology has changed consumer behavior more than in the media and entertainment industry. The rise of streaming entertainment and the so-called cord-cutting trend has been profound. This tailwind has been a major benefit to Roku, as its entire business depends on more households ditching their traditional cable-TV subscriptions.
According to eMarketer, less than 50% of households in the U.S. are still customers of a cable-TV service. The number continues to decline with each passing year.
It's not hard to see why this trend has been so powerful. Streaming entertainment provides viewers with greater choice and convenience. What's more, it comes at a lower price point, without forcing customers to be locked into long-term contracts. It's quite literally a better user experience.
In Roku's case, it offers a platform that aggregates all the various streaming services into one interface. That has led to its growth over the years, solidifying its position as the leading smart-TV operating system in the U.S.
3. Show me the profits
For a business that's been in growth mode, Roku hasn't been consistently profitable on a GAAP basis. It reported positive net income of $242.4 million in 2021, at a time when the pandemic's effects were still being felt that led to a surge in revenue, active accounts, viewership, and monetization. But this was an anomaly.
During the 24-month period from the start of 2022 through 2023, Roku posted a cumulative net loss of over $1.2 billion. That's because management's primary focus has been to continue spending to acquire new customers, while also investing in product development efforts.
Things could be taking a turn for the better. Through the first nine months of 2024, Roku reported a net loss of $93.8 million, which was a massive improvement from the $631.3 million net loss during the same period of 2023.
"Our business has also grown and evolved, and we are now primarily focused on growing Platform revenue and profitability," the Q3 2024 shareholder letter reads. Nonetheless, I still think there is financial risk here, which is something prospective investors can't ignore. Roku has yet to prove that its business model is financially sustainable and can generate positive earnings consistently.
Investors looking to scoop up the stock now should know about Roku's revenue mix, the streaming secular trend, and its bottom-line performance.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.
