Roku stock appears to be turning the corner following its Q3 report last week, rising by 40% over the last five trading days. There was much to like about Roku’s numbers. Revenues came in at $912 million, up by 20% versus last year and well ahead of the roughly $860 million consensus estimates. The market for video advertising has shown signs of a rebound, following a tough couple of quarters, with Roku also seeing higher content distribution sales. Platform revenue was up by 18% versus last year. Roku also added more new users than anticipated, with the total user base standing at 75.8 million, a net increase of 2.3 million active accounts from the previous quarter. This helped to more than offset a 7% decline in average revenue per subscriber. On the hardware front, Roku is seeing a strong uptake for its Roku branded TVs, which launched earlier this year with the sets accounting for a greater portion of net additions compared to the company’s streaming boxes in international markets over the last quarter. Investors are also likely pleased with the performance of Roku’s proprietary streaming offering, the Roku Channel. In Q3, the company reported a notable surge of over 50% in streaming hours on the channel versus the previous year. In September, the Roku Channel accounted for nearly 3% of all TV streaming, a metric that appears to be in line with the levels of engagement observed on other prominent streaming services, such as Paramount+, Peacock, and Max. This could help the company drive higher-margin advertising revenue in the long run.
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. For example, for Q4 the company anticipates year-over-year growth in operating expenses to come in the negative mid-teens, marking a significant improvement from year-over-year growth of approximately 70% in Q4 2022. 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.
Despite the recent optimism and rally in the stock, ROKU stock has actually suffered a sharp decline of 75% from levels of $330 in early January 2021 to around $85 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 104% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% 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 Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality 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?
So is Roku stock still good value at current levels of about $85 per share? 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 $96 per share, which is 17% 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.
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