Roku's Post-Earnings Tumble Echoes That of Pinterest

In some ways, Roku's (ROKU) 15% post-earnings drop has a lot in common with the tumble that Pinterest  (PINS) took last week.

In each case, the user metrics that the company shared were solid. However -- in the wake of strong Q2 reports -- there was disappointment over how quickly each company was capitalizing in the near-term on a big long-term opportunity to better monetize its user base.

On Wednesday, Roku topped Q3 sales and EPS estimates, but also guided for Q4 revenue to be in a range of $380 million to $396 million, with $13 million in revenue expected to stem from its pending $150 million acquisition of ad-buying platform Dataxu. With analyst estimates generally not having modeled any Q4 revenue from Dataxu, the outlook compared unfavorably with a pre-earnings consensus of $388 million.

And with the qualifier that investors have been willing to accept near-term losses from Roku as it continues investing heavily in R&D, sales and marketing to pursue various opportunities, Roku also guided for Q4 net income of negative $17 million to negative $22 million, which was below a consensus of negative $5 million. The company noted that the Dataxu deal is expected to negatively impact the quarter's adjusted EBITDA by $5 million.

But while Roku's Q4 sales and profit guidance was light, the Q3 user metrics it shared were all pretty healthy, and above analyst estimates.

Active accounts rose by 1.8 million sequentially and 8.5 million annually to 32.3 million, thanks to both growing hardware sales and Roku's smart TV licensing deals. Streaming hours continued growing much faster than active accounts (that means viewing per active account continues to grow), rising 68% annually to 10.3 billion.

And Roku's ARPU, which is defined as the Platform (software and services) revenue it received per active account over the last 12 months, grew 30% to $22.58, aided by a swelling video ad business that once more saw ad impressions more than double annually.

However, while ARPU kept growing, it still amounted to just $1.89 per month in revenue per active account -- even though Roku is now averaging more than 100 hours per month of streaming viewing per active account.

Certainly, the fact that a lot of Roku viewing involves ad-free services such as Netflix (NFLX) , Amazon.com's (AMZN) Prime Video and HBO Now and Go (and starting this month, Disney's (DIS) Disney+ and Apple's (AAPL) TV+) needs to be accounted for here.

But there's also quite a lot of ad-supported content being viewed on Roku, between third-party online services such as YouTube and the ad-supported version of Hulu, TV Everywhere apps provided by pay-TV networks such as ESPN and TNT, and Roku's own Roku Channel service.

Though deal terms could be different for some major content partners, Roku typically requires an ad-supported channel to either provide it with 30% of its video ad inventory, from which Roku collects all of the related revenue, or let Roku handle all of its inventory, with the publisher getting a revenue share on Roku's ad sales. And as the Dataxu acquisition drives home, the company is pretty serious about both leveraging its user data and investing in ad tech solutions to help make the most of this opportunity.

In addition, Roku has some avenues for monetizing ad-free video services. These include taking a cut on subscriptions purchased via its platform (the Roku Channel recently added a Premium Subscriptions section), obtaining revenue from the branded video channel buttons on its remotes and showing display ads on its platform that promote subscription services.

Overall, there are still a lot of reasons to think that Roku's Platform ARPU will be a lot higher a few years from now. And with active account growth still above 30% and Roku beginning to step up its efforts to expand outside of the U.S., there are also good reasons to think that Roku will have a lot more users in a few years' time.

Likewise, there are a lot of reasons to think that Pinterest, which fell hard last week after slightly missing Q3 revenue estimates, will in a few years have a quarterly ARPU that's much higher than the $0.90 figure it reported for Q3. And it's also pretty likely that Pinterest's monthly active user count, which was up 28% annually in Q3 to 322 million, will be higher then.

In each case, though, markets were expecting to see stronger top-line momentum for the near-term. With regards to Roku, the fact that shares were up more than 300% on the year heading into earnings and trading for more than 13 times their expected 2020 Platform revenue can't be ignored.

Against such a backdrop, a disappointing quarterly revenue outlook is bound to spark some profit-taking and shake out some momentum traders. But it doesn't put the company's long-term opportunity into question.