Is Roku Stock Attractive At $62 As Engagement Rises And Costs Decline?

Roku (NASDAQ:ROKU) has had a tough year so far, falling by about 30% year-to-date, underperforming the Nasdaq-100, which gained over 10% over the same period. Although Roku posted a better-than-expected set of Q1 2024 results in late April, investors appear to be concerned about higher competition and the company’s expectations of slowing platform sales. So what lies ahead for Roku stock?

For Q1 2024, Roku’s revenue rose 19% to $881 million, and gross profit rose 18% year-over-year to $394.4 million. Growth was driven in part by a higher number of active users on the company’s platform. Roku had 81.6 million active accounts globally as of the end of the quarter, up from 71.6 million at the end of Q1 2023. Roku’s revenue guidance for Q2 was also a bit better than expected.

That said, there are some concerns. Roku’s per-user revenue growth for its platform business appears to be easing. ARPU stood at $40.60 for the last quarter, roughly flat compared to last year. While Roku has been seeing a higher mix of net adds come from international markets, where per-user revenue is lower, there are also some other concerns. Roku could be seeing headwinds related to the streaming service distribution business, which essentially entails taking a commission of subscription fees when users sign up for premium subscription services on its platform. This comes at a time when ad-supported streaming options, including Roku’s own Roku Channel offering, are gaining popularity.

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 40% 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 mega-cap 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. Engagement rates on Roku’s platforms have also been on the rise. The company saw total streaming hours rise by 23% year-over-year, outpacing growth in total accounts.  The Roku channel saw hours streamed rise by 66% year-over-year. This could help the company drive higher-margin advertising revenue in the long run. Roku has made some progress in recent quarters with managing costs. For example, in Q1 the company saw total operating expenses fall by 16% year-over-year, driven by workforce and office space reductions carried out in 2023. Roku is also generating more cash. Free cash flow stood at $426.7 million for the quarter, up from $175 million in the previous quarter and from negative levels in the year-ago quarter.  The stock also trades at just about 2.2x 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 $70, which is 15% ahead of the current market price of $62.  See our analysis on Roku Valuation: Expensive or Cheap for more details on what’s driving our price estimate for the stock.

[1] Returns as of 5/15/2024
[2] Cumulative total returns since the end of 2016

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