Growth investor Cathie Wood didn’t buy or sell anything on Thursday, a rare day of restraint from the CEO and co-founder for the Ark Invest family of aggressive growth exchange-traded funds. The widely followed money manager publishes her market transactions daily. She was also relatively quiet on Wednesday, adding to just one position and selling only a small piece of her stake in Roku (ROKU 1.87%).
Reducing her exposure to Roku isn’t a one-time thing. She sold some shares of the streaming video pioneer in seven of the eight trading days before taking a break on Thursday. In her defense, she was a buyer of Roku shares in late October at much lower price points. She has been trimming her stake only since the stock rallied following its blowout third-quarter results earlier this month. Buying low and selling high looks good on paper, but it could still be a mistake.
Roku has been one of this month’s biggest gainers, soaring 50% since posting its well-received financial update on Nov. 1. The surge has elevated to the point that it’s her third-largest holding. Ark Invest owns a sizable 7.3% chunk of Roku’s total shares outstanding even after the last few days of paring back.
You still have to like Roku’s market leadership in a win-win niche. When the economy’s roaring, Roku benefits from a bump in how much marketers are willing to pay to reach its captive audience. When the economy’s slipping — and you probably saw a few popular retailers surprise the market with declining quarterly sales this week — Roku also wins, even if the victory isn’t scored immediately in that scenario. Advertisers will scale back on their connected TV ads when the leads aren’t worth pursuing, but the platform itself will grow in popularity when folks are saving money by streaming more entertainment from home.
Bullish momentum is roaring back at Roku. Revenue growth has accelerated sharply for three consecutive quarters, and it just posted its first sequential improvement in average revenue per user (ARPU) in more than a year. It has rattled off “beat and raise” quarterly performance consistently this year, and the market’s paying attention. Roku shares are up a hearty 120% this year through Thursday’s close. It doesn’t mean that the party has to end.
Roku is still trading well below its peak, down 82% from the all-time high it hit in the summer of 2021. Growth would slow and profits would turn to losses, but Roku is still more successful now as a business than when it was at its high-water mark nine quarters ago. There are now 75.8 million active accounts relying on Roku to stream from their TVs, a 16% increase over the past year but also 38% higher than at the midpoint of 2021. The 26.7 billion hours streamed on Roku in its latest quarter is 53% higher than the 17.4 billion hours in the second quarter of 2021. In other words, engagement is even stronger than when Roku was a five-bagger from current levels.
The streaming service stock is understandably growing more slowly now than it was at the investment’s prime, but today’s Roku has a stronger command of the market. It has double the market share of its closest stateside competitor and is gaining ground internationally. The lack of profitability is an obvious setback, but adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) just turned positive after more than a year in the red.
Yes, Roku has had a great 2023. It’s also had a breakthrough November. It’s understandable to take profits in this scenario, but there’s no reason Roku can’t keep heading higher. The fundamentals are getting better, Roku is getting stronger, and it’s tackling its fiscal shortcomings. Selling after its recent rally could be a big mistake.