Roku’s Outlook Is Tough, Should You Buy, Sell Or Hold The Stock?

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Digital media streaming company Roku (NASDAQ:ROKU) posted a better-than-expected set of Q3 2022 results, although its outlook for the holiday quarter was weak, causing the stock to fall by almost 19% in after-hours trading on Wednesday. Over Q3, Roku’s revenue rose 12% year-over-year to $761 million, driven by the platform business which sells ads and content. Platform revenue rose 15% versus last year with Roku also adding close to 2.3 million new active new accounts, above levels seen both in 2019 and 2021. Although Roku’s net loss was lower than expected, its profitability continues to be weighed down by weaker margins for the media player business – which sells the company’s streaming boxes – and surging operating expenses, which were up by 70% versus last year. Despite the better-than-expected results, the near-term outlook for Roku appears challenging. The U.S. economy faces mounting headwinds and this is impacting discretionary spending by consumers and hurting marketers’ ad budgets. For Q4, which is typically its seasonally strongest quarter, Roku has projected revenue of about $800 million, marking a decline of about 7.5% versus last year.

Following the sell-off during after-hours trading on Wednesday, Roku stock remains down by over 80% year-over-year. While we have reduced our price estimate for Roku from $96 per share to $71, our valuation is still about 60% ahead of the current market price. Roku currently trades at just over 1.5x consensus 2023 revenues – down from over 10x in 2021 and also below other digital ad players such as The Trade Desk (12x),  Snap (about 3x), and Meta (about 2x). 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 26% over the first nine months of the year, compared to Meta which saw sales remain essentially flat over the same period, and Snap which grew sales by about 17%. 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.

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Returns Nov 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 ROKU Return -2% -76% 5%
 S&P 500 Return -5% -23% 64%
 Trefis Multi-Strategy Portfolio -4% -25% 196%
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  6. Roku Stock Has Taken A Beating. Will Q1 Earnings Change Things?

[1] Month-to-date and year-to-date as of 11/3/2022
[2] Cumulative total returns since the end of 2016

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