Has Roku’s Stock Peaked?

by Trefis Team
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Despite almost doubling since the March 16 lows of this year, at the current price of around $123 per share, we believe Roku’s stock (NASDAQ: ROKU) has a marginal upside. Roku’s stock has increased from $64 to $123 off the recent bottom compared to the S&P which increased close to 35% from its recent lows. The stock has been able to beat the market as the demand for streaming services increased during the current pandemic, leading to expectations of further growth in subscriber base and revenue from Ads and Commission.

Despite the recent stock price recovery, Roku’s stock is around 8% below the levels seen at the end of 2019 (just 6 months ago) and it has partially reached the level it was at before the drop in February due to the coronavirus outbreak, which makes it slightly undervalued. We believe that the stock has a potential marginal upside from the current level. Our dashboard What Factors Drove 136% Change In Roku, Inc. Stock Between 2017 And Now? has the underlying numbers.

Some of the stock price rise between 2017 and 2019 is justified by a large 120% increase in Roku’s revenues, which increased from $0.5 billion in 2017 to $1.1 billion in 2019. The massive revenue surge was driven by growth in subscriber base as well as average revenue per user (ARPU), as demand for streaming services has increased significantly over the last few years. With an increase in revenue, the P/S multiple has also seen a continuous rise between 2017 and 2019.

Roku’s P/S ratio increased from 3x in 2017 to 14x in 2019, due to the drop in revenue per share (as number of shares increased post the IPO in late 2017) and stock price rise. While the multiple saw a marginal drop in 2020 so far and currently stands at close to 13x, we do believe that a further rise in the near term looks unlikely. An elevated valuation multiple reflects expectations of healthy revenue growth in the near term.  With respect to profitability, the company continued to make losses but margins improved from -12.4% in 2017 to -5.3% in 2019.

What’s Driving This Price Stability?

Though the outbreak of coronavirus in early 2020 has led to a gloomy near-term outlook for most industries, the current pandemic could prove to be a boon for Roku. The global spread of coronavirus has led to lock down in various cities across the globe, which has affected industrial and economic activity. The shutdowns in major cities across the globe has led to home confinement of people, which in turn has led to higher demand for streaming services and home entertainment options. This is expected to lead to further growth in subscriber base and revenue. This was to a certain extent reflected in the company’s Q1 2020 results which saw a 55% rise in revenues.

We believe that the company’s Q2 and full-year 2020 results could continue to see such healthy revenue growth expected to be driven by solid growth in active user accounts and a rise in ARPU. 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. Healthy growth in advertising revenue has led to steady growth in ARPU, which increased from $13.80 in 2017 to $23.10 in 2019 and is expected to go to $26.60 in 2020. This trend is expected to continue in the near term as advertising revenue is projected to grow further following the acquisition of dataxu Inc., a demand-side platform (DSP) company that enables marketers to plan and buy video advertising campaigns.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value.

The gradual lifting of lockdown and reduction in home confinement of people is unlikely to have a major bearing on Roku’s stock, which does not seem to face any major downside in the near term, due to its strong revenue growth outlook and improving margins. The stock is expected to rise only marginally from its current level, as the P/S multiple remains elevated. As per Roku’s valuation by Trefis, Roku’s fair price estimate works out to $130.

While Roku seems slightly undervalued valued, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising

 

See all Trefis Price Estimates and Download Trefis Data here

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