Is Roku Stock A Buy Following Q4 Beat?

Digital media streaming company Roku (NASDAQ:ROKU) posted a stronger-than-expected set of Q4 2022 results last week.  Although revenues of $867 million remained roughly flat versus Q4 2021, they came in ahead of expectations as the company had initially guided for a year-over-year sales decline of about 7%. Roku’s devices business saw revenue decline 18% versus last year, while its more lucrative platform business – which sells advertising and content – saw revenue grow by about 5%. That said, this still marks a slowdown from the double-digit growth the platform business has posted in recent years, as rising inflation and slowing consumer spending hurt the advertising market. Things could remain sluggish in the near term as well, as Roku has forecast revenue of $700 million for Q1 2023, marking a 4% decline versus the last year, although this guidance was ahead of estimates.

Roku also appears to be getting more serious about managing its costs. While the company saw operating costs for Q4 surge by a massive 71% versus last year due to higher R&D and sales-related expenses, the company expects that operating expenses will grow by about 40% in Q1 (a 30-point sequential improvement from Q4 2022), with expenses projected to grow by single-digits by Q4 2023.

Now, Roku stock rallied by roughly 30% over the last week and also remains up by over 70% year-to-date in 2023. So is the stock still an attractive bet at current levels of about $71 per share? Although Roku’s business faces headwinds, they are likely 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. Despite economic headwinds, as of Q4 Roku’s active accounts jumped 16% to 70 million while streaming hours also rose 23% to 23.9 billion. Roku’s valuation is also attractive versus historical levels, with the stock trading at about 3x its projected platform revenues for 2023, down from levels of well over 10x in 2021. That being said, Roku’s lack of profitability remains a concern. While the company set a goal of reattaining profitability on an EBITDA basis by 2024, it could take a while before Roku is steadily profitable on a net basis. We value Roku stock at $80 per share, which is about 10% 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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