Down 37% This Year, Will Roku Stock Recover Following Q1 Results?

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Roku (NASDAQ:ROKU) is expected to publish Q1 2024 results toward the end of this month. While the advertising market has seen headwinds over the past year, as businesses held back due to weak consumer spending, we expect Roku to see a recovery over Q1. We expect revenue to come in at about $950 million, slightly ahead of consensus estimates and up by about 20% year-over-year. We project that net losses will stand at about $0.60 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? See our analysis of Roku Earnings preview for more details.

The market for video advertising has shown signs of a rebound of late, following a tough couple of quarters. Over Q4 2023, Roku’s Platform revenue – which includes sales of ads and content –  was up by 10% versus the prior  year. Roku’s total platform user base stood at 80 million, a net increase of 10 million active accounts from the previous year. This helped to more than offset a 4% decline in average revenue per subscriber. Roku’s ARPU has been on a downtrend due to a higher mix of accounts in international markets, which have lower per-user revenues. Engagement rates on Roku’s platforms have also been on the rise. The company saw total streaming hours rise by 21% year-over-year, outpacing growth in total accounts. Roku’s devices business saw sales expand by about 15% over the last quarter, despite overall TV unit sales in the U.S. being down due to higher LCD panel prices. We could see some improvement in Q1, as panel prices ease. Roku’s proprietary streaming offering, the Roku Channel, could also continue to gain traction. In Q4, the company reported a notable surge of over 63% 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, in Q4 the company saw total operating expenses fall by 12% year-over-year. The company cut about 14% of its total workforce in 2023, while consolidating its office space utilization. This should also help profitability, to an extent, over the quarter.

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Looking over a slightly longer period, ROKU stock has suffered a sharp decline of 80% from levels of $330 in early January 2021 to around $60 now, vs. an increase of about 35% 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 Communication Services sector including GOOG, META, and NFLX, and even for the megacap stars TSLA, MSFT, and AMZN. 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 2.1x forward revenue, which is considerably below levels of over 30x that the company traded at its peak in 2021. We value Roku stock at about $87, which is well ahead of the current market price of $58.  See our analysis on Roku Valuation: Expensive or Cheap for more details on what’s driving our price estimate for the stock.

 Returns Apr 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 ROKU Return -11% -37% 12%
 S&P 500 Return -4% 6% 126%
 Trefis Reinforced Value Portfolio -5% 2% 622%

[1] Returns as of 4/17/2024
[2] Cumulative total returns since the end of 2016

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