Roku Stock Up 50% This Year, Will It Rise Further Following Q3 Results?

Roku (NASDAQ:ROKU) is expected to publish Q3 2023 results on November 1. While the advertising market has seen headwinds as marketers hold back due to weak consumer spending, we expect Roku to see some recovery in its revenues versus last year. We expect revenue to come in at $855 million, slightly ahead of consensus estimates and up by about 23% versus last year. We project that net losses will stand at about $2 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 third quarter? See our analysis of Roku Earnings Preview for a closer look at what to expect when the company publishes earnings.

Amidst the current financial backdrop, 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 15% 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 47% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 10% in 2023 (YTD) – 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?

Roku’s lucrative platform business – which sells advertising and content – has seen growth cool in recent quarters as rising inflation and slowing consumer spending hurt spending by marketers on TV advertising. However, over Q2 Roku managed to grow revenue for its platform business – which sells ads and content – by 11%, driven by a 16% year-over-year increase in active users. This helped to more than offset a 7% decline in average revenue per subscriber. We expect this trend to continue over Q3 as well, with sales of Roku hardware also picking up as supply chain issues have eased compared to last year.

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 month that it would lay off about 10% of its total workforce while consolidating its office space utilization. This could help to further curtail cost growth going forward.

While we think that Roku stock can see some gains following Q3 results, is the stock good value for the longer term as well? 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. We value Roku stock at about $80, which is 30% 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. 

[1] Month-to-date and year-to-date as of 10/22/2023
[2] Cumulative total returns since the end of 2016

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