Roku posted a better-than-expected set of Q4 2024 results, Operating profit rose 17% to $512.6 million, while free cash flow for 2024 stood at $203 million. The company also reported that it had over 90 million streaming households as of early January, up over 12% compared to the year-ago period.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Platform

Active accounts: We expect Roku's active accounts to grow from around 90 million in 2024 to about 118 million by 2031, driven by a higher installed base of Roku streaming devices and greater adoption of the Roku OS by TV manufacturers. However, if the metric grows slower, rising to just about 100 million users by the end of our review period, there could be a downside of about 10% to our price estimate. On the other hand, if the metric exceeds our expectations and grows to about 140 million users, there could be an upside of about 10% to our price estimate.

Annual ARPU: We expect ARPU for the platform business to grow from around $42 in 2024 to around $49 in 2031, driven by higher advertising loads and the availability of more premium content, for which Roku takes a commission on sales. However, if ARPUs remain flat at current levels, our stock price estimate could see a downside of over 10%. On the other hand, if ARPUs grow to around $55 in the same time period, there could be an upside of about 10% to our price estimate.

BUSINESS SUMMARY

Roku sells digital media players, enabling users to access Internet-streamed video on television. The company also licenses its operating system, called Roku OS, and its smart TV hardware reference design to TV manufacturers. While the company is best known for its hardware, it has been scaling up its software platform to become a leading player in streaming video distribution, increasingly supplanting linear pay TV.

SOURCES OF VALUE

We believe the Ads & Commissions segment (Platform) is more valuable than the Devices segment for three primary reasons:

1) Its higher revenue base (about $3.5 billion in 2024 versus about $590 million for Devices)

2) Stronger gross margins of 53% in 2024 versus single-digit or negative historical margins for the player business.

3) Higher projected revenue growth rates for the player business.

KEY TRENDS

Cord cutting is gathering pace

Customers have been increasingly canceling their pay-TV subscriptions in favor of Internet-based streaming options. In 2024, U.S. pay-TV players lost over 6 million subscribers combined.

The linear TV market in the U.S. is valuable, with advertising spending on TV estimated at close to $60 billion in 2024 and is expected to decline to $54 billion by 2027 per eMarketer. On the other hand, the connected TV market in the U.S. had grown to $24.6 billion in 2023 and is expected to reach $42.4 billion by 2027. Roku, trying to become a distribution platform for streaming content, could benefit from users and advertisers moving their spending away from linear TV to connected TV.

Higher uptake of Roku OS software by Smart TV players

Roku's software platform is seeing a stronger uptake by TV OEMs, who leverage the company's operating system and reference design to produce connected TVs. As TV sets have long replacement cycles (7 to 10 years, according to IHS Markit), this could give Roku a loyal base of users to grow its platform business.

TREFIS Analysis

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