The trend for cord-cutting continues to speed up as American homeowners cancel their cable and satellite subscriptions and seek better and more affordable ways of accessing digital entertainment online.
One of the most popular alternatives available is Roku, Inc. (ROKU), a company offering a series of hardware boxes and USB dongles that viewers can use to stream a wide array of TV channels.
Customers have been flocking to Roku in ever greater numbers over the last few years, and it’s not difficult to see why. Roku offers a single portal that unlocks access to literally dozens of streaming services, and its interface is highly customizable too.
Gone are the days when users had to pay for content they would never watch, or have to scroll past a multitude of channels before getting to the ones they wanted to watch.
Roku lets its customers install the apps they want, and block the ones they don’t. It’s even app-agnostic, meaning that Roku isn’t in competition with the companies that stream on its hardware – making users more likely to upgrade their boxes as they are getting the widest selection of streaming services as possible.
Perhaps Roku’s strongest point is its cost, with four Streaming Players available at prices between $29.99 and $79.99. The company made sure to pitch its price point well below that of a cable box, and as a result it’s become one of the dominant forces in the streaming market.
Why Has ROKU Stock Been Flat?
Despite the company’s positive reputation with consumers, Roku hasn’t fared quite as well with investors lately. Shares tumbled throughout August and September on the back of a disappointing Second Quarter earnings card.
The firm beat expectations on both top line revenue and bottom line profit, but a drop in important usage metrics saw shareholders exit their positions en masse.
Streaming hours for the Second Quarter 2021 were down 1 billion year-on-year at 17.4 billion hours, and active user accounts fell to 55.1 million against a predicted number of 55.88 million.
No doubt the lockdown-induced boost that previous quarters benefited from will make comparisons this year somewhat of a letdown. The stock is trading at $318 today, 33% lower than its July 2021 all-time high of $479.50.
The situation has not been helped by a large sell-off of stock by ARK Investment Management, which sold half a million shares in Roku totaling $239 million.
The decision to offload its stake in the company was particularly damaging since the fund’s CEO, Cathie Wood, had recently talked up “stay-at-home” stocks such as Roku, saying that investors were mistaken in not seeing the value in such businesses.
Other issues played into Roku’s share price woes, including a warning that its margins could contract in response to the ongoing global semiconductor shortage.
As a good chunk of Roku’s revenues come from its hardware segment, the company is especially sensitive to bottlenecks in chip supply, so much so that its gross hardware margins during the quarter dropped sequentially from 14% in Q1 to -6% in Q2.
Is ROKU Stock Undervalued?
Roku’s present troubles don’t all spell doom and gloom for potential investors, however; its falling share price might even make the stock something of a value proposition right now.
The firm made around $532 million from its platform sales in Q2 – money it makes from advertisements on its box sets – up 117% from $245 million the same quarter last year.
The company also added another 1.5 million accounts over the period, even though it missed analyst predictions for the metric. Good revenue growth and an expanding user base point to a business in sound health.
Furthermore, Roku’s “weak” performance this quarter isn’t unusual for the sector. The media analytics firm Nielsen reckoned that TV viewing hours for all TV streaming platforms was down 2% in Q2, whereas Roku’s viewing time was up 19% – rather than having a bad earnings season, the company actually outperformed its industry rivals.
And on what is arguably the most important measurement of all, ARPU – Average Revenue Per User – Roku is still increasing, despite a slowdown in growth. The firm made $36.46 per user in the Second Quarter, a 42% increase year-on-year.
Roku Vs Google Is A Significant Threat
Roku has seen blistering appreciation in its share price since early 2020, with the stock almost multiplying 5 fold in the interim.
The company has achieved this rapid growth rate by establishing itself as one of the major operating systems for the SmartTV sector, taking 6.4% of the SmartTV streaming device market in 2020, coming in joint-third with Sony PlayStation, behind only Tizen and WebOS in first and second place, respectively.
But this success isn’t guaranteed to continue, especially since the big media companies will undoubtedly try to take market share away from Roku over time.
Indeed, Roku is currently in a battle of sorts with Alphabet Inc. over the terms by which its YouTube TV App is carried on the platform.
Alphabet (GOOG) is seeking preferential treatment from Roku in the form of access to data that Roku normally keeps for itself. The power inequality on show in the disagreement is a portent that Roku won’t have its own way in the future, with the possibility that Alphabet and other important players will make a play to develop their own SmartTV offerings when the opportunity presents.
Roku: Buy or Sell?
The pandemic tailwinds that saw an upsurge in stay-at-home media consumption last year have inevitably led to some poor comparisons with present quarterly results. But allowing for these disparities, Roku is still a business performing well.
Its revenues continue to rise, as does its customer count – and, crucially, the firm is increasing per user spend even when it faces declining margins due to supply chain disruptions.
The stock is significantly down from its July highs, and investors should see that as the perfect reason to buy.
Wall Street experts believe the company can meet a target value of well above $400, suggesting a hefty upside on today’s current prices.
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