Will Cost Cuts, Improving Growth Continue To Power The Roku Stock Rally?

+19.32%
Upside
58.50
Market
69.80
Trefis
ROKU: Roku logo
ROKU
Roku

Roku (NASDAQ:ROKU) has fared well this year, rising by over 2x since early January, considerably outperforming the broader Nasdaq 100, which remains up by 40% over the same period. The stock also gained 6% over the past month, compared to the Nasdaq which remained largely flat.

There are several factors driving the gains in Roku stock. Roku’s fast-growing operating expenses particularly relating to sales and marketing have been a major concern for investors. However, the company has made some progress in recent quarters with managing costs. Over Q2, the company saw its operating expenses rise by just about 8%, down from an increase of 42% in Q1. Moreover, the company appears to be doubling down on its cost cuts, noting last week that it would lay off about 10% of its total workforce. Moreover, the company also raised its third-quarter revenue outlook to a range of $835 million to $875 million, up from $815 million in the year-ago quarter. The upper end of this guidance indicates that Roku could grow by 15% year-over-year, compared to a growth rate of about 11% over Q2. While the advertising market has been facing headwinds as concerns about inflation and slowing consumer spending hurt spending by marketers on TV advertising, the recent guidance raise could indicate that things are getting better, with subscriber additions potentially picking up.

Interestingly, Roku has had a Sharpe Ratio of 0.5 since early 2017, lower than 0.6 for the S&P 500 Index over the same period. This also falls short of the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

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So are more gains in the cards for Roku?  The secular trend of ad dollars shifting away from linear television to digital video formats is likely to benefit Roku. The stock also trades at just about 3.5x forward revenue, which is well below levels of over 30x that the company traded at its peak in 2021. While the cost cuts and slight recovery in growth are positive, Roku is expected to remain loss-making over the next two years per consensus estimates.  We value Roku stock at about $80, which is marginally below 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.

Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 ROKU Return 3% 105% 61%
 S&P 500 Return -1% 16% 99%
 Trefis Reinforced Value Portfolio -2% 29% 560%

[1] Month-to-date and year-to-date as of 9/11/2023
[2] Cumulative total returns since the end of 2016

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