Hidden amidst Roku’s self-congratulations on another quarter of record growth is a secret that the independent streaming platform would prefer you not focus on.
All the key metrics are up. Active accounts have increased by 12.5 million (41%) versus Q2 2019, to 43 million—3 million more than Amazon can boast. Time spent per user soared by 51 hours when compared to last year, an increase of 18%. Total revenues rose by 42% year-over-year, to $356 million, driven by platform revenue hitting the $245 million mark ($168 million Q2 2019).
Also up versus 2019 are total losses.
There is a rocketing cost to Roku’s continued growth. To date in 2020, the company has lost almost $100 million, which is 49% greater than the total lost in 2019, and a huge 638% more than 2018.
Roku will argue that incurring these losses are a necessary part of growth, and that it would be dangerous to cede market share to a rival as hungry and with as deep pockets as Amazon. There’s some truth to this, but as AT&T found out with DirecTV Now’s reckless pursuit of users at any cost, there comes a point where growth for the sake of growth becomes too costly and a comedown begins.
With news in the earnings release that Roku CFO Steve Loudon will no longer be stepping down, questions need to be asked of what Roku’s plan is to begin making profits. The reaction to the results was immediate, with Roku stock soaring from $165.42 at market close to $175.62 in after-hours trading once results were published. The high didn’t last; the stock price fell throughout the earnings call, ending at $157.60 (down by 4.73%).
Loudon should be asked what the plan is to make the investment in growth back, as it’s not clear that the current user base can do it.
While ARPU is increasing (by $3.86 per user, or 18%, versus this point in time last year), it’s not growing in lockstep with active accounts. To break even next quarter, Roku would need to acquire almost 4 million more accounts at zero cost and spend, each generating the current ARPU level of $24.92. This is a tall order; thus more losses look to be on the table.
Should Roku ever reach carriage agreements with HBO Max and Peacock, ARPU would rise, but not be the amount needed to stem the losses. Long-term, Roku may be waiting for the shift of ad-revenue dollars from traditional linear TV to connected devices and AVOD services. But waiting for an expected shift in “the future” is risky—just look at the chaos that 2020 has already experienced.
It’s possible that the plan isn’t to necessarily wait until Roku turns a profit. Acquisition rumors in Q2 saw Roku stock surge; the market clearly thinks a buyer will be likely at some point. Having set the company up as the dominant streaming gateway platform, with growing revenues to boot, Roku will look attractive to anyone wanting to enter the AVOD ad-game.
Roku’s achievements should not be knocked. It is genuinely taking the fight to tech-behemoth Amazon in the battle for connected devices, and has outwitted another in Google, after several attempts from Alphabet to break into the lucrative connected device market. Equally, no one has access to unlimited funds. At some point, the debts Roku is incurring will be called in; the sooner they can demonstrate a plan to be back in the black, the better off the long-term outlook will be.