Netflix Q4: Paid Net Adds Impress, Return to Double-Digit Growth

Posted on January 24, 2024June 30, 2026 by io-fund

Netflix’s Q4 showed a return to double-digit revenue growth, while paid net additions came in strong at 13 million compared to guidance for 9 million. This helped global paid memberships see a fourth consecutive quarter of accelerating growth. Although Q1’s revenue guide for $9.24 billion came up just short of estimates for $9.26-$9.28 billion, it points to YoY growth of 13.2%, a 70bp acceleration from Q4 and a third straight quarter with accelerating revenue growth. The guide represents growth of 16% on a F/X neutral basis for Q1.

Notably, it’s unusual that Q1 would accelerate compared to Q4 given the seasonal, holiday period. This implies that Netflix will see a strong Q1 on a year-over-year basis for paid net additions, as well. Management stated the following: “Similar to prior years, we expect paid net additions to be down sequentially (reflecting typical seasonality as well as some likely pull forward from our strong Q4’23 performance) but to be up versus Q1’23 paid net adds of 1.8M.”

Returning to growth for average revenue per member (ARM) will be an important highlight to watch for next quarter. In Q4, Netflix raised prices for the first time in eighteen months. For reference, when we initiated our position in June of 2022, ARM was in the 7% to 8% range on CC basis. However, for two quarters in 2023, ARM was negative to flat. Management’s comments imply we will see a return to growth for ARM as we move into 2024.

Revenue and EPS:

Revenue of $8.833 billion beat estimates by 1.38%, representing YoY growth of 12.5% and QoQ growth of 3.4%. According to analyst consensus, Netflix bottomed in Q2 of 2023 and has now returned to double digit growth through at least Dec 2025.
EPS of $2.11 grew by 1,658% yet missed estimates by 4.95%, as net margin fell short due to “a $239 million non-cash unrealized loss from F/X remeasurement on our Euro denominated debt (due to the intra-quarter depreciation of the US dollar against most currencies).”
On EPS, Netflix is expected to report double digit growth through June of 2025, and then resume double-digit EPS growth again in the back half of 2025, reflecting improving margins from the ad tier.

Margins:

Margins continue to expand for Netflix across the board. Operating margin is expected to further expand in 2024 from 20.6% in 2023 to 24% in 2024.

As stated in our pre-earnings writeup, thanks to the ad tier, Netflix is expected to be the FAANG which grows the most between now and 2030 in terms of operating cash flow margin (OCF), from 12.4% to 28.5% in 2030.

Gross margin of 39.9% was more than 9 points higher than the year ago quarter at 31.2%
Operating margin for Q4 was 16.9%, ahead of the guided 13.3% figure.
Full year 2023 operating margin was 20.6%, ahead of Netflix’s 20% target and a 280 bp expansion from 17.8% in 2022.
Full year 2024 operating margin is guided to be 24%. Per management: “We are increasing our full year 2024 operating margin forecast from 22%-23% to 24% (based on F/X rates as of January 1, 2024). This reflects the weakening of the US dollar vs. most other currencies since October as well as our stronger-than-forecasted Q4’23 performance and our expectation for how that will carry through 2024.”
Net margin for Q4 was 10.6%, slightly below the guided 11.0% figure due to F/X remeasurement from the Euro, noted above.
Full year 2023 net margin was 16.0%, a 180 bp expansion from 14.2% in 2022.

Cash and Debt:

Cash has grown handily over the past few years and this turnaround is the primary contributor as to why Netflix has returned 150%+ since the June 2022 low. If you look below, you’ll see membership was still trending down prior to 2023, yet strong cash flow carried the stock during that time period.

Operating cash flow in Q4 was $1.66 billion, up 275% YoY. Operating cash flow margin was 18.8%, a ~1320 bp expansion from 5.6% in Q4 last year.
Full year operating cash flow was $7.3 billion, up 265% YoY from $2.0 billion in 2022.
Free cash flow in Q4 was $1.58 billion, up 376% YoY from $332M in Q4 last year. Free cash flow margin was 17.9%.
Full year free cash flow was $6.93 billion, up 328% from $1.62 billion in 2022. As stated in our pre-earnings writeup, $1 billion was due to the Writers and Actors strike.
Cash and short-term investments totaled $7.14 billion.
Gross debt totaled $14.54 billion.

Membership Trends:

Global paid net additions were 13.12 million in Q4, a strong beat considering Netflix had guided that Q4’s global paid net adds would be approximately in line with Q3’s level (implying additions of ~8.76 million).

Global paid memberships totaled 260.28 million at the end of Q4, representing YoY growth of 12.8% and coming in handily above expectations for 10.9% growth to 255.91 million. This was a major milestone as Netflix put up growth that required a pandemic, and not many Covid beneficiaries will be able to return to their former 2021 growth levels.

Paid net additions were >2 million for each geographic segment, marking the third straight quarter in which paid net adds were >1 million in every geography.

UCAN (United States Canada) had a big quarter with 2.81 million added compared to 1 million in the year ago quarter. ARM was up 3% YOY.
EMEA was the biggest contributor at 5.05 million added compared to 3.2M in the year ago quarter. ARM was up 3% YOY
LatAM added 2.35 million compared to 1.76 million in the year ago quarter. ARM was up 4% YOY
APAC added 2.91M compared to 1.8M last year with ARM down (-5%) YOY.

Breaking this down, growth in paid net adds through 2023 has been the strongest in EMEA and UCAN, with both regions seeing strong QoQ growth in each quarter this year.

Average revenue per member increased 1% YoY globally, with a (5%) decline in APAC weighing down on 3% YoY increases in ARM in UCAN and EMEA.

Below, we breakout additional commentary about ARM from the earnings call.

Q1, FY24 Guide

Netflix’s revenue guide of $9.24 billion, though about $40 million below estimates, is pointing to another quarter of acceleration and a second-straight quarter with double-digit revenue growth. On a constant currency basis, Netflix is expecting 16% revenue growth in Q1.

The EPS guide of $4.49 was more than 9% above the consensus estimate for $4.11, driven by a strong QoQ expansion in operating margin — operating margin is forecast to expand 930 bp QoQ to 26.2%, the highest level since Q1 2021.

Netflix added that for 2024, it is expecting “healthy double digit revenue growth…on a F/X neutral basis driven by continued membership growth as well as improvement in F/X neutral ARM as we adjust prices.” Netflix also increased its 2024 operating margin forecast by 100 bp, from 22%-23% to 24%, though this was entirely driven by FX.

Ad Commentary

Netflix talked up its ads business and was optimistic about the future potential of the segment despite it not yet being a strong driver of growth.

Management said it will “continue to invest in and build our ads business” and expects “strong growth in 2024 but off a small base.” Netflix’s longer-term goal is “to make ads a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyondto make ads a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyond,” noting that scaling the ad business offers an “opportunity to tap into significant new revenue and profit pools over the medium to longer term.”

We have seen strong adoption of Netflix’s ad-tiers so far: rising from 5 million in May, to 15 million in November, and to 23 million in early January. Netflix provided more commentary on the growth of ads memberships, saying that similarly to Q3, Q4’s ads membership “increased by nearly 70% quarter over quarterincreased by nearly 70% quarter over quarter, supported by improvements in our offering (e.g., downloads) and the phasing out of our Basic plan for new and rejoining members in our ads markets. The ads plan now accounts for 40% of all Netflix sign-ups in our ads markets and we’re looking to retire our Basic plan in some of our ads countriesads plan now accounts for 40% of all Netflix sign-ups in our ads markets and we’re looking to retire our Basic plan in some of our ads countries, starting with Canada and the UK in Q2 and taking it from there.”

Earnings Call:

Discussion on ARM:

Management didn’t provide much on ARM other than to say it will grow next quarter, and that the price increases and high paid net adds in Q4 will help also contribute to a higher Q1:

Spencer Wang

Great. Thank you, Ted. I'll move this along now to a series of questions regarding our results and the forecast. First, coming from Mark Mahaney of Evercore and this is for Spence. How should we think about ARM growth going forward? Is mid-single-digit percentage increase a reasonable benchmark? And what are the factors that could create either upside or downside to that growth outlook?

Spencer Neumann

Sure, sure. Thanks, Mark. So well, first, stepping back, 2023, as a reminder, was a pretty unusual year for us. It was essentially all member-driven growth because our pricing and plans focus in '23 was on rolling out paid sharing. We had almost no price increases until late in the year in '23.

And even then, it was just a partial quarter impact. As we look to '24, as we noted in the letter for 2024, we expect healthy double-digit FX-neutral revenue growth, including growth in FX-neutral ARM. So we expect continued member growth powered by a grade slate, including the full year impact of our 2023 net adds carrying into 24 and no change to our pricing philosophy. You saw some of that pricing action already in the past quarter. And we should get some help from extra members and starting to scale our ads business.”

More on the Paid Sharing Ramp:

Given it may take until 2025 to see meaningful revenue from the ad tier, one of the more important questions asked if paid sharing is expected to continue to add more subscribers. The answer was long-winded but basically stated they do plan to do what they can to capture more paid sharing members.

Spencer Wang

Thanks, Spence. Doug also has a follow-up question around paid sharing, which I will direct to Greg. How far along are you in terms of the paid sharing benefits? Do you still believe paid sharing will add subscribers for several more quarters? And is there any way to quantify what percentage of the $100 million borrower household population have either become extra members or full paying subscribers?

Greg Peters

Yes. As I mentioned, we've gotten to the point where paid sharing, the paid sharing experience is just something we do at this point. But also, I think it's important to say that like many other things that we do, we also see a real opportunity to continue to materially improve that value translation engine. So we definitely delivered interventions to new cohorts in the last quarter. We're going to continue to deliver to new cohorts in 2024.

But increasingly, I sort of don't think about it as like going after these certain pools, but more about just finding the most effective way to convert folks who are using the service, the right call to action, the right nudge at the right time. And those might have been historical borrowers or folks that are new to the service as well. And we're going to continue to improve that engine. That will continue to improve our growth for years ahead, not just 2024.”

Partner Deal that Could Potentially Double Ad-Tier MAUs:

Spencer Wang

Great. Thanks Greg. A question from Rich Greenfield on advertising. Later this week, T-Mobile's subscriber benefit called Netflix on Us, will convert to Netflix's ad tier unless subscribers upgrade to an ad-free tier? Is it reasonable to assume that your U.S. ad-supported subscriber base will roughly double as a result of this change? And assuming it is, how quickly will you be able to fill that inventory?

Greg Peters

Yes. I won't get into the specifics of a particular deal or provide a forecast for a particular deal, but I'll just say that just as we've done for many, many years, leveraging partner channels is an important part of our subscriber growth strategy. We're applying the same techniques and approaches to scaling our ads membership. And we love having this additional tool. It's very effective, very useful for us because that lower consumer-facing price means that we got room now to bundle the ads plan into a set of lower-priced partner offerings where it was hard to make the economics work for everyone previously.

Evidence Competitors are Struggling:

“Spencer Wang

Great. And as a follow-up to that question around licensing, Ted, your competitors have largely abandoned their opposition to licensing catalog content in Netflix. We've seen, for example, NBC Suits, HBOs, Six Feet Under and more recently, a series of Disney TV titles on Netflix. Do you think your competitors should begin licensing you their new original series as well versus keeping them exclusively to their own streaming services?

Ted Sarandos

Yes. I mean I guess I'd call you back to that history again and just say we've got a rich history of helping break some of the TV's biggest hits like Breaking Bad and Walking Dead or even more recently with Schitt's Creek. Because of our recommendation and our reach, we can resurrect a show like Suits and turn it into a big pop culture moment but also generate billions of hours of joy for our members.”

Conclusion:

While many tech companies are struggling to grow in the current environment, Netflix put up a rare acceleration in key metrics and revenue, plus expansion on margins and cash. Netflix not only cleared a high bar of 13.1 million paid net additions but was able to guide a strong Q1. ARM is weak but this is expected to be transitory. The MAUs on the ad tier could grow quicker than expected due to channel partners such as T-Mobile. We often look for the issues in a report first, and then work backward to the positives. However, this report was flawless.

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Netflix Q4 Pre-ER: Ad Tier Growth in Focus for 2024

Posted on January 22, 2024June 30, 2026 by io-fund

Over the last two years, Netflix has become a remarkable comeback story on the bottom line as the company improved its cash profile from negative (-$3.3 billion) in 2019 to a positive $1.6 billion in 2022.

By raising free cash flow guidance every quarter this year, FCF for 2023 will now come in at $6.5 billion. Of the $6.5 billion, $1 billion is from the Writers and Actors Strike. When adjusting for this, FCF is at $5.5 billion, which more realistically sets expectations for 2024, when content spending will be higher than in 2023. The FCF guide is significantly higher than the initial $3 billion guide during Q4 2022 results. The growth in cash was central to our original entry and decision to build the position.

Thanks to the ad tier, Netflix is expected to be the FAANG which grows the most between now and 2030 in terms of operating cash flow margin (OCF), from 12.4% to 28.5% in 2030. Notably, most FAANGs are at this percentage today except Amazon. In terms of last year, this helps illustrate the remarkable comeback Netflix has seen on its bottom line.

Cutting off password sharing has propped the company’s growth recently with paid memberships doubling its growth rate from 4.5% in Q3 2022 to 10.8% in Q3 2023. This led to Netflix’s net subscriber additions totalling more than 1 million in every geographic segment in both Q2 and Q3 – the first time in back-to-back quarters in more than 3 years.

Per our last write-up:

“In the June quarter of 2022, Netflix reported negative net additions QoQ. This quarter, Netflix reported some of the best growth in recent quarters. Notably, ads are not contributing meaningfully. Password sharing is helping the company drive growth in paid memberships both YoY and QoQ following the December quarter.

Per management: “The cancel reaction continues to be low, exceeding our expectations, and borrower households converting into full paying memberships are demonstrating healthy retention. As a result, we’re revenue positive in every region when accounting for additional spin off accounts and extra members, churn and changes to our plan mix.”

As stated above, the ad roll-out is not contributing meaningfully yet. Ads are a historical pivot for the subscription video on demand (SVOD) juggernaut, and the roll-out has seen some minor delays. This is the primary focus as we move into 2024, and one that requires some speculation as to how it will perform.

Looking forward, there promising signs that Netflix’s ad tier is beginning to ramp. The company recently announced that the ad-tier had surpassed 23 million MAUs, significantly higher than the 15 million reported in November and 5 million in May. In addition to this, Netflix’s ad revenues are forecast to jump 50% next year to top $1 billion, with Disney+ topping the $1 billion ad revenue mark in 2025. Over 80% of ad revenues will stem from CTV, with the remainder from PC and mobile.

We will be looking for more management commentary in the earnings call regarding expectations for 2024.

Source: Beth’s Twitter

Revenue and EPS

The company’s Q3 2023 revenue grew by 7.8% and 8% YoY in constant currency to $8.5 billion, helped by the membership growth from cutting off passwords. This was the highest growth rate in five quarters. This is an acceleration QoQ from the 2.7% growth and 6% on a CC basis last quarter.

Q4 is also expected to accelerate with management guiding for Q4 revenue of $8.7 billion for growth of 11% and 12% on a CC basis. This will be an acceleration in both QoQ (to be expected due to seasonality) and year-over-year with 10% growth reported on a CC basis in the year ago quarter.

Netflix’s revenue growth is expected to trend upward through the June quarter, which is currently marking peak revenue growth for NFLX per analyst consensus at 15.4%. It will then soften to 13.7% in the September quarter, become slightly stronger in the December quarter at 14%, before settling in the 10% range for 2025.

GAAP EPS came in at $3.73 and beat the analyst consensus estimates by 6.7%. Management guide for the next quarter is $2.15.

EPS is a bright spot for Netflix with FY2024 expected to grow 30% — this will be stronger than 2023’s growth of 23%. For FY2025, EPS is expected to grow 22%.

Margins

The highlight with margins is the expanding operating margin.

The Q3 gross margin was 42.3% compared to 39.6% in the same quarter last year and 42.9% in the previous quarter.

The operating margin came in at 22.4% compared to 19.3% in the same quarter last year and 22.3% in the previous quarter. Despite a guide for 13.3% in Q4, the fiscal year is expected to report 20%. Management expects further improvement to 22% to 23% for FY24. The operating margin has been seasonally low in the Dec quarter and the Dec guide is up from 7% last year.

Net margin was 19.6% compared to 17.6% in the same period last year and 18.2% in the previous quarter. The management guide for next quarter is 11% and is up from 0.7% in the same quarter last year.

Cash Flow and Balance Sheet:

The company’s cash flows were a highlight of the Q3 report. The operating cash flow came in at $1.992 billion, representing a cash flow margin of 23.3% compared to 7% in the same period last year and 17.6% in the previous quarter.

Free cash flow of $1.888B represents a FCF margin of 22.1%. This is up from a FCF margin of 6% in the year ago quarter and 16.4% in the previous quarter.

Management increased its FY23 free cash flow guide to $6.5 billion from the earlier $5 billion. When adjusted for the roughly $1 billion from the writers and actors strikes, it comes to $5.5 billion. The management expects to deliver substantial free cash flow in 2024 despite the expected increase of cash content spending in 2024.

As per CFO Spence Neumann in the Q3 earnings call, “So first, in the letter, we talk about the 2024, we hope to get cash content spend back up to at or near that $17 billion level (up from the expected $13 billion in 2023).

The biggest swing factor is going to be when the SAG-AFTRA strike resolves. And so that will get us to a cash to P&L ratio kind of closer to 1:1.1x. And so we're not putting a specific number out there for free cash flow in 2024. What that gets us to, when you think about the combination of our revenue growth outlook, our margin guidance and target cash content spend, we'll deliver substantial free cash flow in 2024. And then going beyond that, we do expect to tick up our content investment over time as we also prove at sustained healthy revenue growth.”we'll deliver substantial free cash flow in 2024. And then going beyond that, we do expect to tick up our content investment over time as we also prove at sustained healthy revenue growth.”

The company has cash & short-term investments of $8 billion and debt of $14 billion. The company returned the excess cash over the minimum cash level through a stock repurchase of $2.5 billion in the quarter and also increased the share repurchase authorization by $10 billion.

Key Metrics

Netflix reported 8.76 million in paid net additions for a total of 247.15 million paid memberships, representing YoY growth of 10.8%. This is the highest number of paid net additions in recent quarters.

Analyst consensus was between 6.5 million and 6.9 million and this was also significantly higher than the management guide of 5.89 million. Per management, this was due to: “the roll out of paid sharing, strong, steady programming and the ongoing expansion of streaming globally"

Management expects paid net additions similar to Q3 of 8.76M, and the expected paid membership growth will be 10.9% YoY to 255.91 million. TD Cowen expects paid net additions of 9.03 million, bringing the paid memberships growth to 11%, reflecting seasonality and a strong slate of Originals in the quarter. The firm's consumer survey shows Netflix remains the top choice for living room viewing.

Regions:

Average revenue per membership (ARM):

Across the regions, ARM in APAC had the most significant decline at (-9%).
The United States region technically declined (Netflix reporting this as 0%) from $16.37 ARM a year ago to $16.29 ARM in Q3.

Paid Net Additions:

All regions added paid net additions. United States added 1.75M up from 1.17M in the previous quarter. This segment is watched closely.
EMEA added the most paid net additions at 3.95M.
The management mentioned in the Q3 shareholder letter that the “Global ARM in Q4 is expected to be roughly flat year-over-year, primarily due to limited price increases over the last eighteen months.” However, with the price increase announced during Q3 results, we could see ARM resume growth going forward.

Per our last write-up, ARM is something to watch: “The weak spot in the report was average revenue per member, which declined (1%). Ideally, this improves with the price hikes the company announced today. This is reflected by a net paid addition beat that does not result in a revenue beat. With management guiding for similar net paid adds as Q3 (implying 9M) plus higher prices, the market is rewarding the stock because it’s assumed ARM will be higher next quarter. Netflix investors should continue to monitor lower ARM countries as time goes on as outsized growth here can potentially weigh on revenue growth. Last quarter, ARM was (-3%) and (-1%) on a CC basis.

What to Watch For:

Last quarter, there was outsized pressure on margin commentary. In the Q3 post-earnings update, we discussed the clarity given by the CFO following the confusion from his commentary at the Bank of America conference in September. You can read more background on this here (main takeaway is that it’s been resolved).

In the Q3 earnings call, he said, “We understood that investors were – they've been pretty patient with us, so we wanted to demonstrate the scalability and the health of the business model. And so that took us from – it was like 4% OI margin to operating income margin business in 2016 to our current roughly 20% margin. So we think a pretty good indicator that ad scale streaming can be a quite good business. Now stepping back, there's no change in our financial objectives and also no change in our long-term margin expectations, including the fact that we see a – and we don't think we're anywhere near a margin ceiling. We've got a long runway of margin growth.And so that took us from – it was like 4% OI margin to operating income margin business in 2016 to our current roughly 20% margin. So we think a pretty good indicator that ad scale streaming can be a quite good business. Now stepping back, there's no change in our financial objectives and also no change in our long-term margin expectations, including the fact that we see a – and we don't think we're anywhere near a margin ceiling. We've got a long runway of margin growth.

So again, no change in our objectives, no change in our long-term margin expectations. But our current profitability and scale, we think it's prudent to balance that historical pace of margin improvement with growth investments. So you asked about growth investments. We think we've got a lot of places where we can continue to invest, plenty of room to invest further in our existing content categories, we're a small share of viewing in every country in which we operate. Plus building out those ads capabilities that Greg talked about our live offering and new content categories like games. So there's plenty to do.”we think it's prudent to balance that historical pace of margin improvement with growth investments. So you asked about growth investments. We think we've got a lot of places where we can continue to invest, plenty of room to invest further in our existing content categories, we're a small share of viewing in every country in which we operate. Plus building out those ads capabilities that Greg talked about our live offering and new content categories like games. So there's plenty to do.”

Conclusion

Netflix’s performance has shown its ability to adapt and innovate, overcoming past challenges and capitalizing on new opportunities. The strong cash flows, accelerating revenue, improving margins, and subscriber growth show that the company has delivered on its promise to shareholders. This has been especially important given the change in management, from the Street favorite, Reed Hastings, to a more collective approach of two CEOs.

One thing we are on the lookout for is if the ad tier’s initial adoption will begin to slow and/or if Netflix will run out of growth levers. This may be more of a concern for 2025. With that said, an ad tier should greatly improve margins as we go along and that’s also central to the story beyond paid net additions.

As always, there is a lot to consider and we will keep you in the loop on how we view Netflix’s inevitable slowing growth come 2025 (or perhaps 2026) in the face of its impressive and expanding margins.

Look for our post-ER report after hours on Tuesday!

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

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Will Roku Go Boom Or Bust In 2020?

Posted on May 7, 2020June 30, 2026 by io-fund

This article was originally published on Forbes on Apr 30, 2020,01:41am EDTForbes on Apr 30, 2020,01:41am EDT

Roku has gained up to 600% in less than 3 years since its IPO despite having many objectors along the way. In light of these sizable gains, Roku has seen five significant drawdowns ranging between 41% to 67%. Therefore, when considering if Roku will go boom or bust this year, I believe it will do both.

When I first began bullish coverage on Roku at $30, the company had a misunderstood business model. At the time I pointed out that Roku was an ad platform first and a hardware player second. At the time, the market was backwards-looking as Roku’s device sales made up 59% of total revenue in the six months leading up to its public offering.

Through 2019, its device sales made up only 34% of its revenue, while the remaining majority came from its platform. What investors initially failed to realize was that the hardware player was a means to its high-yielding ad platform. Roku has an added advantage from the data it has on consumers due to owning the hardware and the many content apps that need access to an OTT device.

With this history, my guess is investors will get Roku’s story wrong again this year as Roku must chose between its top line and bottom line. Covid-19 offers an important opportunity for Roku as OTT usage is skyrocketing and the company must expand globally for long-term growth. (I’ve covered extensively why the domestic market is no longer pertinent in my Netflix coverage).

Often times, growth and earnings are at odds with one another as revenue requires sales and marketing (or other investments), which ultimately eat at the bottom line. Or, in Netflix’s case, revenue growth and free cash flow are at odds. Conceptually, most investors know there is a cost to hyper growth, but in practice, it’s hard to see one of your portfolio companies miss those magical analyst estimates.

Despite monetizing through ads rather than subscriptions, Roku’s best role model for becoming a global media company is Netflix. What Netflix has done beautifully is ignore the pressures that comes with being a public company in favor of being a hyper growth company. This included taking on debt and other risks to gain ground. While I’m not suggesting Roku should take on the debt levels that Netflix has, it wouldn’t hurt for Roku to do whatever it takes to solidify itself as the leading global AVOD channel and ad platform this year.

International Expansion

Roku predicts that by 2024 roughly half of all U.S. TV households will have cut the cord or never had traditional pay TV.

Earlier this year, Roku began its expansion into emerging markets by entering Brazil. Strategically, Roku has partnered with the electronics company AOC to launch AOC Roku TV. The AOC TV/Roku platform will feature popular local content from Globoplay. With over 5,000 channels and over 1,000 free channels, Roku should do well in emerging markets. (I’ve also covered this in detail in a previous analysis.)

Furthermore, Roku has announced fifteen TV brands that come integrated with the Roku platform models. These models are available not only in the U.S., but also in the UK, Canada, and Mexico as of 2020. This kind of strategic partnership with TV models will help the company scale globally, which is a critical next step for Roku.

Pandemic Outlook

Roku recently stated that its commission revenue is expected to jump as viewing hours have increased due to COVID-19. However, it will still feel the shock of ad demand drying up.

Oppenheimer analyst Jason Helfstein cut the price target from $165 to $110. He forecasts Q2 ad platform growth to be around 18% YoY from the previous estimate of 62% growth. With that said, AVOD views are expected to grow 50% and streaming hours increase by 22%.

Needham forecast one or two more quarters of ad weakness, with ad growth uncertain in 2021. Analyst Laura Martin, who has a strong track record on this stock, 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, is cutting the number of ads it runs per hour.”

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Any weakness in Roku’s price will likely be temporary, considering its financials and positioning. Although you could argue this is the case for many advertising companies, connected TV ads are in a growth trend while mobile is reaching saturation.

Unlike many ad-tech peers, Roku is well diversified. According to emarketer, Roku collects $1 million for letting a service like Disney+ take over the Roku home screen. Other companies like Netflix pay $1 for every Roku sold with a Netflix quick-launch button on them.

For every new market Roku expands into and every unit sold, these numbers will only increase with Roku’s brand and helps diversify the company from varying levels of ad demand.

Recent Financials

The company released a preview of Q1 results on April 13, 2020 and reported revenue in the range of $307 to $317 million. This suggests growth of 51% YoY.

For Roku, it matches the same growth we saw in Q1 of 2019, which shows the continued demand in this growing space. Roku estimates 39.8 million active users as of March 31, 2020, which is a net increase of 3 million since December 31, 2019.

It estimates streaming hours of 13.2 billion, which is a 49% YoY increase.

Gross profits were in the range of $139 to $144 million, which suggests a growth of 40% YoY, while net losses were in the range of $60 – $55 million, compared to a net loss of $9.7 million for the same period last year.

As Roku scales internationally, profitable earnings are not expected within the next year. This is the part that Wall Street can often be uncomfortable with; however, it should be factored in that Roku’s revenue growth is solid. As stated above, it has little competition in the niche area of OTT it dominates with manageable debt.

Technical Analysis

Roku has moved in a clear uptrend off the March lows. It recently hit a wall of resistance, which includes a key level around $125-$120, the 200-Day SMA, as well as a downward sloping trend-line from its recent peaks.

With low participation at current prices, as exhibited in the volume, it will need to find more buyers to break through this region. The MACD shows weakening momentum on the daily chart and the RSI shows that its uptrend has broken, as well. We can expect a pullback in Roku in the coming days/weeks.

The key support level to watch is the $102-$86 region. If this zone is broken, we can expect a retest of the recent lows. However, if it holds, we expect new highs for Roku in the coming months.