At $111, There’s Upside For Roku Stock

Roku stock (NASDAQ: ROKU) has had a rough couple of months, declining by 52% year-to-date and by over 76%  from its all-time highs seen in July 2021. While most tech stocks and high multiple names have been hit by rising interest rates, Roku has been particularly badly hit, given that growth is set to cool as Covid-19 wanes, with people increasingly heading outdoors. For Q1 2022, Roku is projecting growth of just about 25%, after growing by over 79% in Q1 2021, as ad spending growth likely cools. Moreover, the tight component supply conditions, rising costs, and shipping constraints in the consumer electronics industry are also having a pronounced impact on Roku, pressuring its streaming device sales and margins while also hitting third-party television manufacturers, who install Roku’s operating system on their smart TVs. Considering that Roku relies heavily on new TVs and streaming boxes as a means of customer acquisition for its Platform business, it’s possible that new subscriber growth figures will also be impacted in the near term.

That being said, Roku stock looks attractive at current levels. Following the big sell-off, Roku stock trades at around levels seen back in 2019, before the Covid-19 pandemic. However, the company has actually made considerable progress since then, with its user base growing by over 60% and its monetization improving considerably. In relative terms, the stock trades at just a little over 4x projected revenue currently, compared to over 12x back in 2019. In comparison, The Trade Desk, another fast-growing digital ad player with exposure to smart TV ads, presently trades at over 18x forward revenue. We value Roku stock at about $184, which is roughly 65% ahead of the market price.  See our analysis on Roku Valuation: Expensive or Cheap for more details on what’s driving our price estimate for Roku. Our analysis of Roku Revenue has more details on the company’s business model and key revenue streams.

The transition from linear TV toward connected TV is a secular trend and Roku remains well positioned in this space, with a growing base of over 60 million active accounts and with its TV operating system installed on more than 1 out of 3 TVs sold in the United States. Roku has been making solid progress in monetizing its users via ads and growing investment in content. The average revenue per user rose by over 40% year-over-year to $41 in Q4 and there’s probably a lot more room for growth in the long term, given that advertisers apparently spent just about 18% of their U.S. TV ad budgets on connected TVs last year. Roku has also been investing considerably in its own streaming app, called The Roku Channel, and this is likely to help the company boost ad revenues further. As the supply chain headwinds following Covid-19 are gradually resolved with hardware supply improving, it’s possible that Roku’s growth and margins will also pick up. Roku could also see upside from its expansion into international markets, given that revenues are currently largely concentrated in the U.S.

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[1] Month-to-date and year-to-date as of 4/17/2022
[2] Cumulative total returns since the end of 2016

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