VALUATION HIGHLIGHTS

1. Ads & Commissions constitute 87% of the Trefis price estimate for Roku's stock.

WHAT HAS CHANGED?

1. Latest Earnings - Q4 2023

Roku posted a better-than-expected set of Q4 2023 results, with revenue rising 14% to $984.4 million and gross profit rising 20% year-over-year to $437.9 million. Growth was driven in part by a higher number of active users on the company's platform. Roku had 80 million active accounts globally as of the end of 2023, up from 70 million at the end of 2022.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Platform

• Active accounts: We expect Roku's active accounts to grow from around 70 million in 2022 to about 110 million by 2029, driven by a higher installed base of Roku streaming devices and greater adoption of the Roku OS by TV manufacturers. However, if the metric grows slower, rising to just about 90 million users by the end of our review period, there could be a downside of about 20% to our price estimate. On the other hand, if the metric exceeds our expectations and grows to about 160 million users, there could be an upside of about 20% to our price estimate.


• Annual ARPU: We expect ARPU for the platform business to grow from around $42 in 2022 to around $56 in 2029, driven by higher advertising loads and the availability of more premium content, for which Roku takes a commission on sales. However, if ARPUs only expand to about $50 by 2029, our stock price estimate could see a downside of over 10%. On the other hand, if ARPUs grow to around $70 in the same time period, there could be an upside of about 20% to our price estimate.

BUSINESS SUMMARY

Roku sells digital media players enabling users to access Internet-streamed video via television sets. The company also licenses its operating system, called Roku OS, and its smart TV hardware reference design to TV manufacturers. While the company is best known for its hardware, it has been scaling up its software platform to become a leading player in streaming video distribution, increasingly supplanting linear pay TV.

SOURCES OF VALUE

We believe the Ads & Commissions segment (Platform) is more valuable than the Devices segment for three primary reasons:

1) Its higher revenue base (about $2.7 billion in 2022 versus about $400 million for Devices)

2) Stronger gross margins of 56% in 2022 versus single-digit or negative historical margins for the players business.

3) Higher projected revenue growth rates for the player business.

KEY TRENDS

Cord cutting is gathering pace

Customers have been increasingly canceling their pay-TV subscriptions in favor of Internet-based streaming options. In 2022, U.S. pay-TV players lost 5.9 million subscribers combined, per the Leichtman research group, compared to losses of less than 1 million subscribers in 2016.

The linear TV market in the U.S. is valuable, with advertising spending on TV estimated at $66 billion in 2021 per eMarketer, with user spending on pay-TV subscriptions standing at over $100 per month. Roku, trying to become a distribution platform for streaming content, could benefit from users and advertisers moving their spending away from linear TV to connected TV.

Higher uptake of Roku OS software by Smart TV players

Roku's software platform is seeing a stronger uptake by TV OEMs, who leverage the company's operating system and reference design to produce connected TVs. As TV sets have long replacement cycles (7 to 10 years, according to IHS Markit), this could give Roku a loyal base of users to grow its platform business.