Roku Stock Rose Sharply When the Company Announced It Had Reached 70 Million Users, but It’s Not All Good News

Roku Stock

Roku Stock (NASDAQ:ROKU)

Roku (NASDAQ:ROKU) continues to gain popularity among couch potatoes who use streaming devices to navigate their television consumption. On Thursday, Roku said it has more than 70 million paying subscribers.

In terms of market share, the business responsible for the nation’s most widely used TV operating system for streaming content has roughly twice as much as its closest competitor. This was a significant increase of at least 16% from a year ago when just 60,1 million households were using the Roku platform. It also accommodates at least 4.6 million more active accounts than three months ago.

The break in continuity is welcome, but Roku stock is at its most successful during the winter months. In late December, many people received Roku dongles and smart TVs with the operating system preinstalled as gifts. It’s still a significant improvement from its 3.7 million net additions in the last three months of 2021. Although this is welcome information, the underlying issue remains.

Striking a Proper Equilibrium

Thursday was wrong for the markets, although Roku stock rose marginally on the news. A trend that always stays in style is growth. While Roku has not changed its previous projections, which predicted a drop of 8% year over year in revenue for the quarter ending December 31, 2018, something has to give.

While an increase in users is always encouraging, a drop in income of 8% cannot be explained by a rise of 16% in the number of people using the service. Warning: the answer isn’t participation. In a press statement issued on Thursday, Roku reported record user streaming of 23.9 billion hours of content in the fourth quarter, a 23% year-over-year growth. Instead of lessening their Roku use over the previous year, people have increased their time spent on the streaming service.

So, we are left with the average revenue per user (ARPU). Marketers have taken notice of Roku because of the platform’s scalability and expanding user base. Roku relies heavily on advertising money since its hub is accessible to users. The average revenue per user (ARPU) has increased throughout the years, reaching $44.25 in the third quarter of this year. For the previous 12 months, the average platform user has spent $44.25 thanks to the platform’s soaring income per user.

Weaker hardware sales and a rare slide in ARPU would be to blame if revenues dropped 8% in the fourth quarter despite a 16% gain in active users. Roku’s player income has been difficult due to supply chain restrictions and promotional activities, which have reduced profitability and slowed top-line growth. The stock market will be shaken if ARPU falls, however. As 2022 progressed, the advertising industry began to decline, and the connected TV advertising business was no exception. ARPU may continue to be unsettling.

The leading stock in the streaming video industry may take heart from this development. According to the company’s projections, third-quarter sales were expected to increase by just 3% over the same period last year. Results showed a gain of 12% after accounting for inflation. Guidance of a 3% gain and an 8% drop are still quite different. Let’s toast Roku for reaching its ambitious target of 70 million active accounts! When Roku finally reveals its financial numbers in a few weeks, be prepared for the dismal ARPU that will inevitably spoil the party.

Featured Image: Megapixl @  Wolterk

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About the author: I'm a financial journalist with more than 1.5 years of experience. I have worked for different financial companies and covered stocks listed on ASX, NYSE, NASDAQ, etc. I have a degree in marketing from Bahria University Islamabad Campus (BUIC), Pakistan.