Roku Stock Gained 56% Over The Last Three Months, Will It Rise Further Following Q4 Results?

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Roku (NASDAQ:ROKU) is expected to publish Q4 2023 results around mid-February. While the advertising market has seen headwinds through much of 2023 as marketers held back due to weak consumer spending, we expect Roku to see a recovery over the fourth quarter. We expect revenue to come in at about $970 million, slightly ahead of consensus estimates and up by about 12% versus last year. We project that net losses will stand at about $0.53 per share, slightly better than the consensus estimates.  So what are some of the trends that are likely to drive Roku’s performance for the quarter?

The market for video advertising has shown signs of a rebound of late, following a tough couple of quarters. Over Q3 2023, Roku’s Platform revenue – which includes sales of ads and content –  was up by 18% versus last year. Roku also added more new users than anticipated, with the total user base standing at 75.8 million, a net increase of 2.3 million active accounts from the previous quarter. This helped to more than offset a 7% decline in average revenue per subscriber. We are likely to see similar trends over the holiday quarter as well. On the hardware front, Roku is seeing a strong uptake for its Roku branded TVs, with the sets accounting for a greater portion of net additions compared to the company’s streaming boxes in international markets over the last quarter. Roku’s proprietary streaming offering, the Roku Channel, could also continue to gain traction over the holidays. In Q3, the company reported a notable surge of over 50% in streaming hours on the channel versus the previous year. This could help the company drive higher-margin advertising revenue in the long run.

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. For example, for Q4 the company anticipates year-over-year growth in operating expenses to come in the negative mid-teens, marking a significant improvement from year-over-year growth of approximately 70% in Q4 2022. The company appears to be doubling down on its cost cuts, noting last month that it would lay off about 10% of its total workforce while consolidating its office space utilization. This should also help profitability to an extent over the quarter.

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ROKU stock has suffered a sharp decline of 75% from levels of $330 in early January 2021 to around $90 now, vs. an increase of about 30% for the S&P 500 over this roughly 3-year period. However, the decrease in ROKU stock has been far from consistent. Returns for the stock were -31% in 2021, -82% in 2022, and 125% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that ROKU underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ROKU face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

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 3.3x forward revenue, which is well below levels of over 30x that the company traded at its peak in 2021. We value Roku stock at about $97, which is 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 the stock. 

Returns Feb 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 ROKU Return 0% 116% 70%
 S&P 500 Return 0% 26% 116%
 Trefis Reinforced Value Portfolio -1% 37% 603%

[1] Returns as of 2/1/2024
[2] Cumulative total returns since the end of 2016

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