Digital media streaming company Roku (NASDAQ:ROKU) has had a challenging 2022, with its stock declining by about 83%, touching four-year lows. While tech stocks in general have been impacted by rising interest rates, there are multiple other factors weighing on Roku. Firstly, the company was impacted by supply chain-related issues in its streaming hardware business as well as lower subscriber growth following the easing of the Covid-19 restrictions. Moreover, the digital ad market is cooling off as the U.S. economy faces mounting headwinds. This is impacting discretionary spending by consumers and hurting marketers’ ad budgets. For the all-important holiday quarter, Roku has projected revenue of just about $800 million, marking a decline of about 7.5% versus last year. Profits are also being weighed down by weaker margins for the media player business and surging operating expenses, which were up by 70% year-over-year in Q3.
That being said, we don’t think the current headwinds warrant a sell-off of this magnitude for the stock. For perspective, Roku stock remains down by almost 92% from all-time highs seen in 2021. While Roku’s business faces headwinds, we believe that they are temporary and we believe 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. In fact, many of the company’s key platform metrics are still expanding. Over Q3 Roku’s active accounts grew by 16% year-over-year to 65 million users, while average revenue per user increased by 10% to $44.25 per account. Engagement also remains pretty strong, with total hours streamed on the platform up by 21% year-over-year over the third quarter. Roku’s valuation is also looking very compelling. At the current market price of $41 per share, Roku trades at just about 2x its projected platform revenues for 2022, down from levels of well over 10x in 2021. This multiple is also below other digital ad players such as Snap and Facebook parent Meta, who both trade at about 3x. Moreover, Roku is actually growing more quickly compared to Snap and Facebook. We value Roku stock at $71 per share, which is about 70% ahead of the current 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.
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