Justin Sullivan
Elevator Pitch
My rating for Roku, Inc.’s (NASDAQ:ROKU) stock is a Buy.
I touched on Roku’s below-expectations Q4 2021 top line and Q1 2022 management guidance with my earlier March 7, 2022, write-up for the company.
I upgrade my rating on ROKU’s shares from a Hold to a Buy in this latest article. ROKU’s poor share price performance last year and its depressed valuations have already factored in the short-term headwinds for the company. I take the view that Roku’s stock price should go up in time as investors regain confidence in the company’s long-term growth prospects.
Why Has Roku Stock Crashed In 2022?
ROKU’s share price fell by -82.6% in 2022 as compared to a relatively modest -20.0% correction for the S&P 500 in the prior year.
In my opinion, Roku’s stock crashed last year because the company experienced significant revenue growth deceleration and turned loss-making in 2022. Its top line has been adversely affected by weak advertising demand and stiff competition. At the same time, ROKU has continued to invest for the future. The company had earlier stressed at its most recent Q3 2022 earnings briefing in November last year that it would still “make disciplined investments in our most strategic projects.”
In the next section, I highlight the metrics relating to Roku’s slower top line expansion and higher costs, which explains why ROKU’s shares performed so badly in 2022.
ROKU Stock Key Metrics
Roku’s YoY top line growth moderated from +33.2% in the fourth quarter of 2021 to +27.8% for the first quarter of 2022, before decelerating further to +18.5% and +12.0% for Q2 2022 and Q3 2022, respectively as per S&P Capital IQ data. The company also delivered much higher revenue expansion growth rates of +79.0%, +81.2%, and +50.5% for Q1 2021, Q2 2021, and Q3 2021, respectively on a YoY basis.
On the other hand, ROKU’s expenses have been creeping up. The selling, general & administrative (SG&A) costs-to-revenue ratio for Roku rose from 26.3% for Q4 2021 to 30.6% and 35.2% in Q1 2022 and Q2 2022, respectively. Roku’s SG&A expenses-to-sales ratio has gone up to as high as 38.9% for the third quarter of last year based on S&P Capital IQ data. As a result of the huge increase in operating costs, Roku went from achieving positive earnings in full-year 2021 to suffering losses in the first nine months of 2022.
The near-term outlook for Roku isn’t encouraging, as the company is expected to witness further revenue growth deceleration and wider losses in the current year. As per S&P Capital IQ’s consensus financial projections, ROKU’s top line expansion is forecasted to slow from +10.8% for FY 2022 to +6.0% in FY 2023, while analysts estimate that its normalized net loss will widen from -$487 million to -$570 million over the same period.
Is ROKU Fairly Valued Now?
The key question for investors is whether Roku’s current valuations have already adequately priced in the company’s disappointing 9M 2022 financial performance and its lackluster 2023 outlook.
ROKU’s consensus forward next twelve months’ Enterprise Value-to-Revenue multiple has derated from its five-year peak EV/Revenue metric of 26.9 times registered in February 2021 to 1.5 times now as per S&P Capital IQ’s valuation data. The stock’s current trailing twelve months’ Enterprise Value-to-Gross Profit ratio of 3.2 times is also way below its five-year historical high EV/Gross Profit multiple of 88.6 times.
Peer Valuation Comparison For ROKU
| Stock | Trailing Twelve Months’ Enterprise Value-to-Gross Profit Multiple | Consensus Forward Next Twelve Months’ Enterprise Value-to-Revenue Multiple |
| Roku | 3.2 | 1.5 |
| VIZIO Holding Corp. (VZIO) | 3.6 | 0.6 |
| Snap Inc. (SNAP) | 5.1 | 3.0 |
| Magnite, Inc. (MGNI) | 6.2 | 3.4 |
Source: S&P Capital IQ
Roku’s trailing EV/Gross Profit multiple is the lowest among its peers as per the peer comparison table presented above. In addition, its consensus forward EV/Revenue metric is the second lowest in the peer group.
Wall Street analysts also think that ROKU’s shares are cheap according to the target prices assigned to the stock. The mean price target for Roku is $59.51, which suggests that the company’s shares could potentially rise by +39% from its closing stock price of $42.76 on January 5, 2023. It is noteworthy that even the most bearish sell-side analyst is of the view that Roku’s shares have limited downside, as his or her price target of $40 translates into a downside of -6%. On the flip side, the most bullish Wall Street analyst sees Roku’s share price more than doubling to $90.
In conclusion, I am of the opinion that ROKU is undervalued now, taking into account the sell-side price targets and a comparison of its current valuations with peers and history.
What Is The Long-Term Outlook?
I have an optimistic view of Roku’s growth prospects in the long run, after considering the potential impact of recent developments. Specifically, I think concerns about a structural decline in market share for ROKU seem to be overdone, as the company is taking steps in the right direction to drive its long-term growth.
On January 4, 2023, the company issued a media release disclosing that it is introducing its “first-ever Roku-made” and “Roku-branded” TVs to the market this year. I view this as an important move made by ROKU to arrest TV OS (Operating System) market share loss.
Amazon (AMZN), which has previously adopted a strategy of licensing its Fire OS to TV makers, had already started marketing its own brand of TVs in late 2021. On the other hand, Korean TV manufacturers Samsung (OTCPK:SSNLF) (OTCPK:SSNNF) and LG have their eyes on expanding their respective TV OS market shares by entering into TV OS licensing deals with other TV makers who don’t have their own OS.
In a nutshell, the lines between TV makers and TV OS developers are blurring, and Roku’s move to come up with its own brand of TVs will help the company to defend and even strengthen its competitive position. In an interview with CNBC on January 5, 2023, the CEO of ROKU emphasized that its self-branded TVs will boost its efforts “growing (its) consumer base” and “market share.”
Separately, ROKU appears to be open to exploring new growth opportunities relating to collaborations with third-party demand-side platforms or DSPs.
Roku had previously noted at its Q3 2022 results briefing that the company is “looking at ways to work with partners to increase our revenue stream.” ROKU’s comment was made in response to a sell-side analyst’s question on whether it will change its current stance on “refusing to let third-party DSPs bid on TRC (The Roku Channel) and other inventories.”
Oppenheimer recently issued a research report (not publicly available) titled “Roku, Inc: See Upside from 3P DSP Integration & Access to AVOD Inventory” on December 6, 2022. In this report, Oppenheimer estimated that ROKU’s share of the worldwide Connected TV market will increase from 4.5% in 2023 to 4.8% for 2026. A key assumption supporting Oppenheimer’s market share growth forecasts for Roku is that the company makes a U-turn on its policy of disallowing third-party demand-side platform bidding, rather than just focusing solely on its own demand-side platform known as OneView.
In a nutshell, I am of the view that Roku’s actual financial performance and market share in the long term should exceed the market’s expectations.
Is ROKU Stock A Buy, Sell, Or Hold?
ROKU stock is now rated as a Buy. Roku’s current valuations are depressed, and I have a positive view of its long-term outlook.
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