Is It Finally Time to Buy Roku?

Cord-cutting has become a mainstream phenomenon nowadays. The rising cost of cable TV subscriptions and popularity of streaming services has led people to shrug off their cable or satellite TV subscriptions. There is even a rising population of a demographic that has never been cable subscribers, i.e., the “cord-nevers.”

By 2026, a full 80 million are expected to be part of cord-cutting households in the U.S. Roku, Inc. (NASDAQ:ROKU) has benefitted from this move, but does it have what it takes to dominate the market?

How Has Roku’s Growth Been?

Roku has neatly divided its operations into two broad segments. Firstly, its platform, where it earns revenues through digital advertising and distribution of streaming services.

Next is the device segment that supports its top line through the sale of Roku-branded TVs and other related products.

It almost goes without saying that the Roku platform is the lead moneymaker. In 2023, this segment accounted for 86% of its total revenue.

This percentage has increased significantly since the company’s foray into the public market. In 2017, platform revenues made up 44% of the total top line.

On the topic of sales, total net revenue has been constantly increasing for the last six years. Last year, Roku racked up $3.48 billion in revenues, an increase of 11.5% year-over-year.

In Q1 FY2024, the company posted a $881.47 million net revenue, a hike of 19% from the prior year’s period. Once again, the prominence of its platform was notable.

Roku reportedly has more top streaming apps than any other platform in the U.S. Basically, it has incorporated its competition into its streaming platform. Moreover, even if the customer has cable, there are no additional charges to watch many cable or satellite channels on Roku devices.

All this flexibility has led to the company having a whopping number of subscribers. As of the first quarter, although average revenue per user (ARPU) was flat year-over-year, the subscriber count of streaming households stood at 81.6 million, a 14% growth rate from the prior-yearly period. In addition, streaming hours went up by 23% to 30.8 billion.

As far as weaknesses in growth are concerned, Roku has yet to post two consecutive years of positive yearly net income on a GAAP basis. Gross margin has seen lots of ups and downs over the past few quarters and is in or around the 40-45% range.

However, on the profitability front, Roku is working towards a breakthrough. There have been improvements in lowering total operating expenses, and adjusted EBITDA margin is also looking better.

Just How Dominant Is Roku?

Roku has made quite a name for itself. Although the device segment is not its chief moneymaker, it still enjoys market prominence as the #1 selling TV OS in the U.S. and Mexico, and is working towards further expansion. This year, the company announced a Pro series of its high-performing TVs.

Sports is one of the most important content segments for the Roku platform. The platform has various sections dedicated to easily finding sports. For example, the NFL zone for Super Bowl viewers and the NBA zone for basketball fans.

Recently, the company landed exclusive multi-year rights for Major League Baseball (MLB) Sunday Leadoff live games, inaugurating an MLB zone on the platform.

Advertising is the prime revenue driver for Roku. The platform is in a lucrative spot for advertisers with its huge household streaming numbers and its position as the #1 TV streaming platform by hours streamed in the U.S.

Video advertising across the Roku platform is growing at a faster pace than the overall ad market and traditional domestic linear TV ad market, with its home screen and video ads reaching U.S. households with nearly 120 million people on a daily basis in the last quarter.

Will Roku Stock Bounce Back?

Roku is likely to bounce back to $73 per share according to the consensus estimates of 23 analysts. 

The reasons to be bullish include the fact that the digital ad market was not in a good spot some time ago but has begun to stabilize.

Video streaming services are also experiencing a slowdown. According to the Bank of America, these offerings saw a drop in downloads and active users earlier this year.

Finally, Roku itself gave a tepid outlook due to past price increases and a shift in the mix towards ad-supported offerings but is now trading at just 2.29x forward sales, a very reasonable sales multiple.

Sentiment appears to be moving in favor of the stock too with 3 analysts revising their earnings guidance higher for the upcoming quarter.

Keep in mind also that Roku is a cash-rich company with around $2 billion on the balance sheet. That’s a very high figure given the company’s market capitalization is just $8 billion.

All that cash provides optionality to expand and drive new initiatives, as well as to perhaps even acquire other firms. Even better is the fact that it’s not counterbalanced by any debt burdening the firm.

So, while Roku has yet to swing to profitability, the signs are pointing to the firm trading at a reasonable valuation and technically looking stronger of late too. All in all, an interesting stock to look at for a longer term hold.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.