Could Roku Stock Hit $450?

by Trefis Team
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Trefis analysis shows how Roku’s stock could potentially approach $450 in 5 years from its current levels of around $130, as a counter analysis to our Roku downside case of Roku Stock Downside: $30? To achieve this, Roku will need to scale the number of active accounts from its platform business (which sells ads and premium content) from 37 million in 2019 to 125 million by 2025. It’s a tough ask, but then Roku did achieve the uphill task of increasing its active accounts from 9 million in 2015 to 37 million in 2019. Also, for Roku stock to reach $450+, it will need to improve its earnings margins to about 22% even as it increases active accounts and ARPUs.

Below we discuss the specifics of Roku stock upside of $450 by 2025, included with our interactive charts to test sensitivity to underlying assumptions. Deeper insights on Roku’s Revenues and our base case valuation for Roku of $140 are also available separately as context to this analysis.

Purpose of this analysis: To shine the spotlight on the unexpected but possible – the outlier situations. Share underlying data + assumptions. To help you be more prepared.

Roku’s stock price has soared from $43 in Jan 2018 to about $135 in Jan 2020

  • This translates into a CAGR of 75% over two years. In comparison, the S&P has returned under 10% a year in the same period.

This is what it will take for Roku stock to cross $450:

#1. Roku Active Accounts: While Active Accounts are likely to grow to 50 million in 2020, the metric can grow to over 125 million by 2025

  • Roku’s Active Accounts grew at a CAGR of 42% between 2015 to 2019.
  • It is possible for Active Accounts to grow at a CAGR of 20% between 2020 and 2025 because of the following reasons:

 

#1.1 Large Market: Roku is useful (A) to cord-cutters & (B) for streaming cable or popular content from ESPN, Fox, Netflix, Google Play, Hulu, etc. directly to your TV

  • The market for streaming video is growing fast. For instance, Netflix had a total of 167 million subscribers at the end of 2019, up from 94 million in 2016.
  • On the other hand, traditional pay-TV subscriptions are on the decline.
  • The large-scale shift towards streaming, coupled with Roku’s platform-agnostic model, could help the company scale up its user base.

#1.2 Significant room for international expansion

  • Roku derives over 90% of its revenues from the U.S., meaning that it still has considerable room for global expansion.
  • For example, Netflix saw its International subscriber base grow from under 11 million in 2013 to 115 million in 2019.

#1.3 Roku’s Increasing Exposure to Smart TV Space

  • Roku also licenses the operating system it uses on its streaming boxes to TV manufacturers, and this business is growing fast, with Roku OS accounting for roughly one-third of smart TVs shipped in the U.S. in 2019 – up from 20% two years ago.
  • Smart TV-based Roku platform users could be very loyal, as TVs have long replacement cycles (7 to 10 years per IHS Markit), and this could further improve Roku’s base of Active Accounts.

 

#2. Roku Revenue: Roku’s Revenues could grow to $6.8 billion by 2025

  • This assumes that active accounts will grow from about 37 million in 2019 to 125 million by 2025, with ARPU rising from about $20 per year to over $50, driven by increasing engagement and more premium content sales.
  • This also assumes that revenues from the Players business – which sells Roku steaming hardware – will grow from $380 million in 2020 to $760 million by 2025.

#2.1 How ARPUs could rise to $54 by 2025: Comparing Roku’s ARPUs with Netflix and Pay TV players

  • Netflix ARPUs, on an annualized basis, stood at over $110 in 2019, while the ARPU for Comcast’s Pay TV business stood at over $1,000 per year.
  • Considering that Roku sells ads and premium content, its ARPU has a lot of room to scale-up going forward.

Our interactive dashboard about Roku stock upside details trends in Roku’s ARPU vs. that for Netflix and Comcast over the years

 

#3. Roku’s Net Income: The strong revenue growth will need to be accompanied by steady improvement in margins, with Roku’s Net Margins growing to 22.5% in 2025

  • This would translate into a Net Income of $1.7 billion in 2025
  • While Roku’s Net Margins are currently negative, the company should see margins ramp up considerably as the variable costs of its platform business are likely to be very low.

#3.1 Roku’s Net Income Margins could be roughly in line with Google’s and slightly ahead of Disney

  • Roku’s business is likely to be geared towards selling advertisements, much like Google. Hence we believe its margins could be comparable to Google in the long-run.

 

#4. Roku Valuation: We believe that Roku stock could be worth over $450 by 2025

  • This assumes a P/E multiple of about 35x by 2025 and shares outstanding at 129 million.

#4.1 Why P/E multiple of 35x in 2025?

  • Netflix trades at about 80x, with revenue growth averaging about 30% and margins standing at about 8%
  • Google trades at about 24x, with revenue growth of about 20%-23%, and margins of a little over 20%

 

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