What Drove Roku Stock Up 10% Last Week

Roku stock (NASDAQ:ROKU) has had a good run of late, rising by about 10% over the last five trading days. The stock also remains up by about 14% since its Q2 2024 earnings were published earlier this month. So what are some of the trends driving Roku higher?

Roku’s results for the last quarter were better than expected, with revenue growing by 14% year-over-year to $968 million, and operating losses contracting to $71 million. Key operating metrics were also strong, with streaming hours up 20% and total accounts for the platform business – Roku’s cash cow which sells ads and content –  growing 14%. Device sales have also picked up, rising by 39% compared to last year, ensuring that Roku’s install base, which is crucial for customer acquisition for its platform business, continues to expand.  The Roku Channel, the company’s proprietary streaming offering, has gained in terms of engagement, with streaming hours up nearly 75% year-over-year with the offering emerging as one of the most popular free, ad-supported streaming offerings in the U.S. This channel is expected to drive higher-margin advertising revenue in the long run. Besides the strong results, investors are likely seeing more value in Roku, given that the stock is still down by over 30% year-to-date despite the company posting reasonably strong earnings over the last two quarters.

Now 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 $65 now, vs. an increase of about 50% 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?

Overall, we believe that the risk-to-reward trade-off for Roku stock remains very positive at the current market price of about $63 per share. The stock trades at just a little over 2x estimated 2024 revenue, which is considerably below levels of over 30x that it traded at its peak in 2021. The metric falls below 2x if we exclude Roku’s sizable cash position of about $2 billion. Growth is also likely to hold up, as the secular trend of ad dollars shifting away from linear television to digital video formats is likely to benefit Roku in the long run. Roku could also get more competitive with its programmatic advertising after it signed a new partnership with The Trade Desk, the largest independent demand-side platform.  Roku has also made some progress in managing costs in recent quarters. For example, in Q2 the company saw total operating expenses fall by 2% 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 $318 million for the quarter, compared to negative levels in the year-ago quarter.  This takes the company’s year-to-date cash flows to over $740 million. We value Roku stock at about $67, roughly 7% 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] Returns as of 8/22/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates