Roku Stock In 3 Years: What’s Possible?

Roku Inc (NASDAQ: ROKU), a company that sells streaming media players, digital content and advertising, has seen its stock rise by 135% in the last 5 months and by 10% since the beginning of this year, with its market cap standing at roughly at $19 billion. The stock now trades at close to 12x projected 2020 revenues, despite the fact that the company is likely to post losses this year as well. Does this make the stock expensive? Probably not, considering that revenues could grow 2x by 2023, with net income turning positive and growing steadily, generating continued returns for shareholders. Here’s how this is possible.

For more details on Roku’s historical performance, see our dashboard analysis What Factors Drove 190% Change In Roku, Inc. Stock Between 2017 And Now?

Roku’s revenues could grow by close to 3x from the estimated level of $1.5 billion in 2020 to $4.3 billion in 2025, representing a growth rate of roughly 23% per year (for context the annual growth rate was about 30% between 2016 and 2019). There are multiple trends that support this continued growth. Firstly, Roku’s active user base has expanded sharply, registering a y-o-y growth of 41% during Q2 2020. Sure, part of this was due to Covid-19 and the related lockdowns, which forced people to stay home and rely on streaming and home entertainment options, but Roku has actually seen growth in daily active users pick up over the last few quarters as well. Its active user base increased from 13.4 million at the end of 2016 to 43 million as of Q2 2020, growing at a CAGR of 40% during this period and the growth is expected to continue. 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, the effect of which is expected to be further augmented by higher streaming demand due to the ongoing lockdown. The growing user base, coupled with higher ad revenues could help the company boost its ARPUs and overall revenues. Roku’s ARPU has increased from $9.30 in 2016 to $24.92 in Q2 2020, a rise of 168%. 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.

While we expect Roku to post a loss this year, the company’s operations could turn profitable in 2022 as ad revenues pick up post the Coronavirus, and as the company’s past investments in R&D and product development start paying off. While Amazon posted margins of more than 4% in the last fiscal year (Net Income, or profits after all expenses and taxes, calculated as a percent of revenues), the company is a dominant force in the markets with its size being significantly large in comparison, which makes it probably unreasonable to expect similar margins for Roku who has still not made any profits. However, it’s reasonable to assume that as Roku’s business gains scale, it can boost margins to about half the levels of Amazon in the next few years, so we estimate roughly 2% margins by 2023. Considering our revenue projections of roughly $3 billion and 2% margins, $60 million in Net Income is likely possible by 2023.

Now if Roku’s revenues grow 2x, the P/S multiple will shrink to 0.5x its current level, assuming the stock price stays the same, correct? But that’s what Roku investors are betting will not happen! If Revenues expand 2x over the next few years, instead of the P/S shrinking from around 12x presently to about 6x, a scenario where the P/S metric falls more modestly, perhaps to about 9x looks more likely. For context, rival Amazon trades at roughly 5x. One might assume that Roku will trade slightly ahead of Amazon considering that it’s likely earlier in the growth cycle. This would make growth in Roku’s stock price by about 50% a real possibility in the next three years, taking its market cap to about $27 billion.

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