Roku’s Audience Growth is Impressive, But Ad Outlook Remains Fuzzy
photo credit: Roku Instagram page
Roku is finding itself caught between two diverging trends, and investors are stuck choosing which to weigh more heavily. As an aggregator of streaming entertainment content, Roku is a clear winner emerging from the mass exodus from cable television. The problem in the near-term is, however, the lack of visibility into digital advertising strength, which Roku is heavily reliant on.
Key numbers from Q2:
Platform Revenue: Increased 46% y/y to $245 million.
Total Hours Streamed: Streaming hours grew 65% y/y to 14.6 billion. While impressive, the consensus estimate was for 15.1 billion hours. Engagement peaked in early Q2 but stayed higher than pre-COVID levels.
Active Account Growth: Roku experienced net adds of 3.2 million active accounts, the highest amount ever for a non-Q4 period. Total Active Accounts now sits at 43 million.
Brand loyalty: Existing Roku users added about 3 million new Roku streaming devices to their accounts in Q2, which RBC says is “an indication of their strong brand appeal.”
Glass half-full or half empty? Video ad impressions grew about 50% y/y in the second quarter, compared to around 100% growth in the previous quarter. While the deceleration could cause concerns, it’s important to acknowledge the broader advertising environment. Overall U.S. TV ad spend fell 24% and U.S. digital ad spend dropped 5% y/y in the second quarter, according to data from Magna Global. Here’s what a couple of analysts had to say:
“While we believe Roku’s Ad platform is facing headwinds due to its considerable exposure to Brand advertising spend and its reliance on verticals like Casual Dining, Travel & Tourism, we are struck by the fact that ROKU just printed approx. 50% Y/Y Ad Revenue growth in (hopefully) the most COVID-impacted quarter.”-RBC analyst Mark Mahaney.
“More to the point, the material slowdown in advertising impression growth in the quarter from nearly doubling in 1Q 2020 to just +50% in 2Q 2020 is a bit worrying given the high level of stress in the 2Q 2020 linear ad markets and is a key area to watch in the coming months.” MoffettNathanson’s Michael Nathanson.
Reason for caution: Audience growth is a critical component of Roku’s future success, but an uptick in potential competition makes it less certain that this engagement will translate to dollars in the long run, according to MoffettNathanson.
“As we have seen with the Internet names like Snap and Twitter, strong user numbers are often enough in this environment to create investor optimism around the potential for long-term revenue growth post the COVID-19 crisis. However, given looming competition from Android and TV OEMs, and the lack of granular KPI data, we are less comfortable extrapolating these gains into the future.”
Looking ahead: Investors were disappointed with Roku’s lack of Q3 commentary and visibility, but management said that Active Users, a leading revenue indicator, was growing strongly quarter-to-date.
