Why We’ve Cut Our Price Estimate for Roku, But Still Remain Bullish on Stock


Roku Stock (NASDAQ: ROKU) has had a tough few months, with a 50% year-to-date decline and more than 75% from all-time highs. There were several factors driving the sale. First, investors have largely reduced the allocation to high multiple growth stocks, in a rising interest rate environment, and Roku, which traded at more than 20 times earnings at its peak in mid-2021. , was particularly affected. Roku’s business is seeing growth slow as the number of people staying at home gradually declines following the easing of Covid-19 restrictions. Roku’s earnings and outlook for the fourth quarter of 2021 were weak, with the company forecasting revenue growth of around 25% for the first quarter of 2022, following growth of more than 79% in the first quarter of 2021, as market analysts marketers are likely to reduce ad spend, due to supply headwinds. and rising inflation which harms the whole economy.

Additionally, Roku’s player business – which sells the company’s streaming devices – is also in a tough spot, amid tight component supply conditions and shipping constraints in the industry. consumer electronics. Roku opted to insulate its customers from higher costs by keeping its streaming device prices flat, leading the gamer division to post deeply negative gross margins (about -31%) in the fourth quarter. This trend is also expected to continue into 2022. Supply headwinds are also impacting third-party TV makers, who are installing Roku’s operating system on their smart TVs, with sales now reportedly below industry-leading levels. before covid. The decline in the number of TVs and players sold also has a direct impact on Roku’s platform business growth, as fewer new platform users will be added.

We reduced our price estimate for Roku to $184 per share from over $400 per share previously to account for slowing growth and the relatively difficult near-term outlook for the company’s gamer business. However, our price estimate remains about 60% ahead of the market. There are several reasons, in our opinion, to stay on Roku for a long time at current levels. The transition from linear TV to connected TV is a centuries-old trend and Roku remains well positioned in this space, with a growing base of over 60 million active accounts and with its TV operating system installed on more than 1 TV in 3 sold in the United States. States. Roku has made solid progress in monetizing its users through advertising and increasing investment in content. Average revenue per user is up over 40% year-over-year to $41 in Q4 and there’s likely a lot more room for growth given advertisers apparently spent around 18% of their US TV advertising budgets on connected TVs last year.

Roku’s valuation is also compelling. While the stock is now trading at levels close to those seen before the pandemic, the company has actually made considerable progress since then, with its user base growing by more than 60% and its monetization improving significantly. In relative terms, the stock is currently trading at just over 5x expected earnings, compared to over 12x in 2019. The Trade Desk, another fast-growing digital advertising player focused on TV commercials, is currently trading more than 15 times earnings. We also believe that Roku’s current strategy of undermining the profitability of its gamer business is the right strategy at this point, given that it is essentially a customer acquisition tool, driving growth. from its much more lucrative platform operations, which have gross margins of over 60%. As the post-Covid-19 supply chain headwinds are gradually resolved with improving hardware supply, it is very likely that Roku stock will see an upside.

See our analysis on Roku review: Expensive or Cheap for more details on what drives our Roku price estimate. Our analysis on Roku revenue has more details on the company’s business model and major sources of revenue.

What if you were looking for a more balanced portfolio instead? Here’s a high-quality wallet that has consistently beaten the market since late 2016.

Return March 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
Back ROKU -18% -50% 122%
S&P 500 return 0% -9% 95%
Performance of the Trefis MS portfolio -1% -11% 249%

[1] Monthly and cumulative total as of 03/17/2022
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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