3 Things to Know About Roku

Earlier this month, Roku (NASDAQ: ROKU) reported stronger-than-expected revenue and a smaller loss than anticipated on the bottom line, only to see its stock fall more than 20% the next day. Investors appeared to be responding to weak guidance for the fourth quarter, but the company did more than provide numbers. Executives also held a conference call with analysts.

Here are some bits from that call that investors should consider.

1. Advertising tools are crucial to Roku's future

Roku's market share is impressive (37% of the streaming media player market earlier this year), and it managed to record a 43% year-over-year increase in active accounts in Q3 despite major competition from the likes of Amazon (NASDAQ: AMZN), which is pushing hard to make its Fire TV platform the new front-runner in the streaming business. The May report that put Roku's share at 37% gave Amazon Fire TV 25%, saying Amazon was gaining while Roku's share was flat.

But Roku did not report profits in the most recent quarter. It reported a $0.09 loss per share, which was better than the $0.12 loss analysts were expecting. Roku's future depends on its ability to monetize its large user base, and that means ads.

Here's what CEO Anthony Wood said about that [transcript via Seeking Alpha]:

Prioritizing advertiser-facing offerings like insight and analysis tools is a smart move. Wood's comment about inertia in the advertising market may or may not be accurate, but the important thing here is that Roku isn't standing pat: It's making an effort to woo advertisers away from their old ways and toward ads on Roku's streaming channel and menus.

2. Roku is still riding a larger cord-cutting wave

Roku counted 23.8 million active accounts at the end of the quarter, but how much are those people streaming? A lot, as it turns out: Roku's 43% year-over-year increase in users was smaller than its year-over-year increase in streaming hours, which came in at 63%. Streaming hours hit 6.2 billion in the quarter.

Roku's strength relative to its peers and its near-term potential for profits should be viewed through the lens of its position within a larger and growing market for streaming video. Cord-cutting is still the wave of the future, and is in fact an accelerating trend. A rising tide of people without cable who need ways to watch entertainment will lift a lot of boats.

This doesn't release Roku from its need to compete with rivals like Amazon, of course. And it's easy to see why Roku execs didn't emphasize the fact that Roku grew without crushing its competition -- investors want to hear about victories. But Roku is lucky to be in a growing market. It's fighting for pieces of a pie that is growing, not shrinking.

3. Roku's smart-TV partnerships offer key advantages -- but Amazon plays this game, too

Roku's growth in users was impressive, but it wasn't something that it accomplished alone. The company's hardware partners played a crucial role in expanding Roku's user base. Take Wood's word for it: "Our business model is to grow our active account[s] by licensing our Roku TV platform to TV companies and also selling players."

Roku's TV manufacturing partners include TCL, Sharp, Hisense, and Philips. Roku is doing very well with its smart TVs, but Amazon is after that same market. Though slightly later to the smart-TV game, Amazon has now licensed its Fire TV platform for use on smart TVs created by its own partners. And Amazon has a new partnership with Best Buy that has Fire TV on TVs sold under Best Buy's Insignia brand -- a brand that also works with Roku. The Insignia model is Fire TV's best-reviewed TV so far and by far.

Wood was quick to downplay the impact of that, noting that Roku expects to sell more smart TVs at Best Buy even as Amazon makes its move. But the Best Buy-Amazon partnership could matter for market share. Investors should keep an eye on Roku and Amazon as they duel this holiday season. Sales of Amazon's Insignia model versus the Roku TV models being sold at the same Best Buy stores could help foretell which company has the better holiday season overall.

10 stocks we like better than Roku, IncWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Roku, Inc wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Stephen Lovely owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.