Why Did Roku Stock Soar 6%?

Roku stock (NASDAQ:ROKU) gained nearly 6% on Thursday and has climbed 11% over the past week. What’s driving this upward momentum? One factor is an analyst upgrade by Wolfe Research, which raised its rating on Roku stock from Hold to Buy, anticipating stronger connected TV ad sales and improved monetization. Additionally, inflation in the U.S. has cooled, with the Consumer Price Index rising just 2.5% year-over-year in August. This marks the lowest increase in nearly three years. Easing inflation should pave the way for a rate cut by the Federal Reserve as early as next week, a development that could boost tech stocks such as Roku.

Roku’s operational and financial performance has also improved a bit. Over Q2, Roku’s revenue was up 14% year-over-year to $968 million while operating losses were reduced to $71 million. Key metrics such as streaming hours (up 20%) and total platform accounts (up 14%) also strengthened, while device sales jumped 39%, helping to increase Roku’s installed base.  The Roku Channel, the company’s proprietary streaming offering, has also 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. Despite these improving results, Roku stock remains down over 15% year-to-date, potentially creating an attractive opportunity for investors.

Despite the recent gains, Roku stock remains down considerably from levels of over $450 per share in 2021.  Moreover, the decrease in ROKU stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were -31% in 2021, -82% in 2022, and 125% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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 stock trades at just a little over 2.5x estimated 2024 revenue, which is well below the double-digit multiples the stock traded at in 2021. That said, Roku faces some challenges, too. Roku’s streaming service distribution business, which facilitates the subscription process for streaming services and earns commissions for the same, is seeing some headwinds as more streaming services, including Netflix, focus on selling more affordable, ad-supported plans as customers look for better value in a mixed economic environment.  Moreover, Roku has to increasingly compete for advertising-related revenue with big technology players including Netflix, Meta, and Alphabet in the video market. We value Roku stock at about $67, which is slightly below 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 9/13/2024
[2] Cumulative total returns since the end of 2016

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