Roku Inc (NASDAQ: ROKU) estimates that it gained 3 million new accounts in the first quarter and saw streaming hours increase 49% year-over-year — partly thanks to global shelter-at-home orders.

“The strength in streaming hours was partially offset by the addition of ‘Are you still watching’ feature in Q1, which ends video streaming after extended periods of user inactivity,” RBC analyst Mark Mahaney said in a note.

“We believe that the strength in Active Accounts and Streaming Hours is consistent with the broader industry trends in growing engagement and streaming hours (NFLX, SPOT, DIS) during the COVID Crisis.”

Based on such streaming trends, Roku projects first-quarter revenue between $307 million and $317 million, with a net loss between $60 million and $55 million. Wedbush expects the actual results to come at the high end of the guidance.

Takeaways On Roku

The pandemic may have improved streaming engagement, but it also undercut the industry’s revenue source by slicing global advertising budgets. So far, Roku may have fended off the revenue threat, according to Oppenheimer.

“Since Roku sells most of its advertising inventory at least 30 days in advance, we think there was less exposure to the industry-wide slowdown in digital advertising, but we would expect some advertisers to negotiate cancellations,” analyst Jason Helfstein said in a Monday note.

"We do think Roku was hit by negotiated cancellations, but fared better than programmatic peers and social media co's."

Oppenheimer expects ad headwinds of 30% to 40% to stunt second-quarter earnings and decelerate revenue growth to 17%.

Needham forecast one or two more quarters of ad weakness, with ad growth uncertain in 2021. Analyst Laura Martin said Roku may be able to withstand the storm with its unique model.

“A key thing that differentiates Roku in this environment is that it doesn't set its ad-prices at auction,” Martin said in a Tuesday note.

“It uses a direct sales force to set negotiated prices, just like traditional linear-TV. We believe that, even though ad-demand has been falling, Roku is still charging $30+ CPMs, and instead cutting the number of ads it runs per hour.”

Such a strategy improves the consumer experience without undercutting post-pandemic pricing power.

Despite buffering forces, Wedbush expects lower ad rates to pressure revenue per user.

“Roku’s path to profitability is unclear, as Roku looks to navigate a likely recession while expanding its workforce to support its next leg of growth,” analyst Michael Pachter said in a Tuesday note.

“Achieving profitability in Roku’s international markets will take time, in our view, while declining advertising demand puts the current year at risk.”

Roku's valuation will stay volatile as the company navigates both a recession and international expansion, the analyst said.

The ROKU Ratings

• Needham maintained a Buy rating on Roku and cut its price target from $200 to $150.

• Oppenheimer maintained an Outperform rating and raised the price target from $110 to $120;

• RBC maintained an Outperform rating and trimmed its price target from $142 to $139.

• Wedbush maintained a Neutral rating and $86 target.

ROKU Price Action

Roku shares were trading 10.8% higher at $106.99 at the time of publication Tuesday.

Photo courtesy of Roku.

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