One of last year's hottest debutantes has been big flop this year. Shares of Roku (NASDAQ: ROKU) have plummeted 38% in 2018, falling nearly 60% since peaking in early October. A lot of things are weighing on the stock lately, but the year ahead should bring some relief.
Roku remains a fast-growing leader in video streaming technology. There are 23.8 million active users leaning on Roku for their digital entertainment through either namesake streaming devices or licensed smart TVs running its operating system. Let's go over a few of the reasons why Roku may be out of favor, but is ready to roar back into investor fancy in 2019.
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1. Recent storm clouds will pass
There are a few things dogging Roku these days. Roku's mixed guidance was a disappointment in last month's third-quarter report, but some factors outside of Roku's control have also contributed to the stock price getting cut by more than half since the start of October.
The biggest culprit is rising trade tensions with China. Several of Roku's nine television-manufacturing partners are Chinese, and the threat of higher tariffs on Chinese smart TVs could either cool consumer demand for cheap flat screens or nudge them to other smart TVs that don't come with Roku OS. It also doesn't help that TCL -- one of Roku's biggest champions -- is undergoing a major restructuring. The silver linings here are that the trade spat with China could ease or that Roku will pick up some of that business through its other licensed partners. TCL has also gone on to clarify that TVs will continue to be a big part of its business.
Another setback was a report last month that Apple (NASDAQ: AAPL) was working on a dongle, providing a cheaper option for streaming than its current Apple TV that is priced at the high end of the market. Apple is already making a big push for original content for the streaming service that it will inevitably roll out in 2019. Roku should be able to withstand this challenge. It has withstood other tech giants with dirt cheap gadgetry. One can't dismiss the allure of Roku as a service-agnostic platform. Unless Apple decides to limit its service to iOS devices, Roku will be more than happy to carry it as one of its thousands of other offerings. The same can't be said for tech giants that have tactical intentions in sometimes sidestepping rival streaming services. Apple won't hurt Roku, and in the long run it may actually help the platform.
2. Investors can't ignore growth
Unlike its sinking stock price, Roku's business just keeps getting better. Revenue rose 39% in its latest quarter, fueled entirely by a 74% surge in platform revenue that now accounts for more than half of its revenue.
Roku's mixed guidance saw it boost its top-line goal at the expense of coming up short on the bottom line. That's fine. This isn't an earnings growth story at this stage of its life cycle. Roku's guidance calls for revenue to rise 35% to 41% for the current quarter. That top-line growth goal is actually pretty good considering that growth has been sandbagged during the holiday quarter in the past by the slow-growing hardware sales. Revenue during last year's fourth quarter rose a mere 28%.
3. Never bet against stickiness
The platform works. There are now 23.8 million users relying on Roku -- up 43% over the past year -- but that is just one of the three pieces of this stacked engagement cake. These users consumed 6.2 billion hours of streaming content in the third quarter, a 63% increase. The final nugget to consider is that average revenue per user is up 37% to $17.34 over the trailing 12 months.
Let's break this down again. There's a 43% increase in users and a 63% spike in usage, so the platform has never been stickier. The average person is spending more time streaming through Roku. Average revenue per user rising 37% over the past year is the cherry on top. Investors should keep an eye on these engagement metrics, but if they continue to stack up the way they have in Roku's brief publicly traded tenure, 2019 is going to be a monster year.
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Rick Munarriz owns shares of Apple and Roku, Inc. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.