Is Roku Stock Oversold?

ROKU: Roku logo

Roku stock (NASDAQ:ROKU) fell by 11% over the last three trading days following its weaker-than-expected Q2 2022 earnings report, taking its year-to-date decline to about 67%. While Roku has been weighed down by supply chain-related issues in its streaming hardware business as well as lower subscriber growth following the easing of the Covid-19 restrictions for some time now, a new set of challenges are emerging for the company’s platform business. The U.S. economy looks weak, with GDP contracting over the last two consecutive quarters, and stubbornly high inflation hurting household budgets and consumer confidence. This, in turn, is causing marketers to curtail their spending on digital ads, which are one of Roku’s most profitable revenue streams. Over Q2 2022, while Roku’s revenue rose 18% year-over-year to $764 million, down from 81% growth in the year-ago quarter, the company posted an operating loss of about $110 million, compared to an operating profit of $69 million a year ago. With subscriber growth slowing, Roku has had to resort to higher spending on customer acquisition, with its sales and marketing expenses almost doubling year over year to $185 million. Looking forward to Q3 2022, Roku expects revenue to come in at $700 million, up just about 3% versus last year and down sequentially while guiding for a net loss of about $190 million.

We have reduced our price estimate for Roku to $98 per share from about $140 per share previously to account for the slowing growth and the relatively tough near-term outlook. However, our price estimate remains about 30% ahead of the market price. There are a couple of reasons, in our view, to remain long on Roku at current levels. 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 63 million active accounts. Roku has made solid progress in monetizing its users via ads and growing investment in content, with ARPU rising 21% versus last year to about $44 in Q2. Although growth rates are likely to slow in the near term, there is a lot more room for expansion in the long run. Advertisers are expected to spend just about 22% of their U.S. television ad budgets on streaming in 2022, despite the fact that streaming accounted for roughly half the TV time of  U.S. consumers aged between 18 to 49 over Q2. As the mix of streaming ad spending grows, companies such as Roku should benefit. Moreover, Roku’s valuation also looks compelling, with the stock trading at under 3.5x forward revenue, well below the 12x levels the company was trading at pre-pandemic.

See our analysis on Roku Valuation: Expensive or Cheap for more details on what’s driving our price estimate for Roku. Our analysis on Roku Revenue has more details on the company’s business model and key revenue streams.

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Returns Aug 2022
MTD [1]
YTD [1]
Total [2]
 ROKU Return 16% -67% 46%
 S&P 500 Return -2% -15% 82%
 Trefis Multi-Strategy Portfolio 0% -13% 242%
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[1] Month-to-date and year-to-date as of 8/3/2022
[2] Cumulative total returns since the end of 2016

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