Roku (NASDAQ:ROKU) is likely to report Q3 2022 results in the coming weeks reporting on another quarter that is likely to see weakness in the company’s hardware business. We expect revenue to grow by just about 4% year-over-year to around $710 million in Q3, slightly ahead of the consensus estimates, although this would mark a considerable slowdown from growth rates of close to 50% in Q3 2021. We project that net losses will stand at about $1 per share, slightly better than the consensus estimates.
So what are some of the trends that are likely to drive Roku’s performance this quarter? We expect Roku’s Platform business – which sells content and advertising – to continue to expand revenue versus last year, although growth rates are likely to cool off. Consumers have been scaling back on spending while advertisers are also rethinking their television ad budgets due to soaring inflation. This is likely to impact Roku’s average revenue per user growth. Over Q2 2022, Platform ARPU rose by 21% to $44 and we expect to see a slowdown in Q3. Moreover, Roku’s subscriber growth – which is linked to the installation of new Roku streaming boxes and smart TVs could also be weighed down by the weaker consumer spending environment, although this could be partly offset by retailers lowering TV prices to liquidate excess inventory. We expect Roku’s Platform margins to also trend lower due to a higher mix of content sales versus advertising sales and also due to potential concessions on ad prices. Roku’s core media player business will also see revenue trend lower due to weaker consumer spending and strong competition from big tech giants Amazon, Apple, and Google who have been growing their presence in the streaming hardware space.
Now Roku stock has declined by over 75% year-to-date, due to concerns of slowing growth and also as the broader market pivots away from unprofitable growth stocks to value stocks and bonds. However, we think Roku stock is undervalued at current levels, trading at just a little over 2x 2022 revenues – down from over 10x in 2021 and also below other digital ad players such as The Trade Desk (16x) and Meta (close to 4x). While Roku’s business faces headwinds, we think its lucrative platform business should continue to expand in the long-run as ad dollars continue to shift away from linear TV to digital video formats. For perspective, Roku’s platform sales rose 30% over the first six months of the year, compared to Meta which grew sales by under 3% over the same period, We value Roku stock at about $97, which is considerably 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.