Is Roku’s Stock Fairly Valued?

Based on its current market price and future growth prospects, Roku Inc. (NASDAQ:ROKU) looks fairly valued as its future growth prospects have largely been reflected in the whopping 3.3x rise in the company’s stock price in the last one year. Trefis has a price estimate of $140 per share for Roku’s stock, which is slightly above its market price of $130 as on January 10, 2020.

To understand the major factors that are driving our price estimate for Roku’s stock, see the Trefis interactive dashboard – Roku’s Valuation: Expensive or Cheap? – and alter the key assumptions to arrive at your own estimate for the company’s stock price.

Company Overview

• Roku allows you to watch paid and free content from the internet such as Netflix, Amazon, Hulu, YouTube, etc.
• Its platform revenue comes from advertising sales, subscription and transaction revenue share, sales of branded channel buttons on remote controls, and licensing arrangements with TV brands and service operators. Players’ revenue comes from the sale of streaming players through consumer retail distribution channels.
• Primary competitors include large technology and consumer electronics companies like Amazon, Google, and Apple.

A] Estimating Total Revenues

Roku’s revenues grew by 86% from $399 million in 2016 to $743 million in 2018. Revenue is expected to increase to $1.1 billion in 2019 and further to $1.6 billion by 2020, which amounts to the revenue base more than doubling (111% projected growth rate between 2018-2020) in two years.

a) Platform

• The platform division has added $312 million in revenues in the last two years, with the revenue addition expected to more than double in the near future, as Trefis projects the division to add close to $770 million to its revenue base between 2018 and 2020.
• Higher revenue is expected to be driven by healthy growth in active user accounts and a rise in ARPU.
• Average active user accounts increased from 11 million in 2016 to 23 million in 2018. It is set to grow further to about 43 million by 2020.
• Sharp growth in the user base is likely to be driven by new player launches and smart TV operating system (OS) integrations, that include new Roku streaming players launched in September 2019, new smart soundbars at Best Buy and Walmart, and new Roku smart TVs from OEM partners like TCL.

b) Players

• To see how Roku’s Players division is performing and what is the outlook, view our dashboard analysis.

You can also see how Roku’s total revenue growth trend compares with that of its major peers, here.

B] Estimating Revenue Per Share (RPS)

• RPS has decreased from $84.00 in 2016 to $7.10 in 2018 due to a sharp rise in the number of shares outstanding as Roku went public in 2017. We estimate RPS to increase to $9.43 in 2019 and further to $12.74 in 2020.
• Expected rise in RPS in 2019 and 2020 can be attributed to faster growth in revenues, with share count expected to rise only marginally during this period.

C] Estimating Roku’s Share Price

• As per Roku’s Valuation by Trefis, we have a price estimate of $140 per share for Roku’s stock.
• The stock price estimate is arrived using the discounted cash flow valuation technique, which you can find in Roku’s detailed financial model here.
• Based on projected RPS of $12.74 per share and stock price estimate of $140 per share, Roku’s forward price-to-sales (P/S) multiple stands at 11x.

To understand how Roku’s P/S multiple compares with its major peers, view our interactive dashboard analysis.

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