Stock Analysis & Ideas

Roku: Plenty of Positives, but Is Relatively Overvalued

Roku, Inc. (ROKU) is a television streaming platform. It operates through two business segments: Player and Platform. The Player segment consists of net sales of streaming media players and accessories through retailers and distributors, as well as directly to customers through the company’s website.

Its Roku platform allows users to personalize their content selection with cable television replacement offerings and other streaming services that suit their budget and needs. Roku, Inc. was founded in 2002 and is headquartered in San Jose, California.

Shares of Roku finished 2021 with losses of 31.3%, underperforming the Nasdaq, which had gains of 21.4%. Is Roku among Top Analysts‘ picks for 2022? I am bearish on ROKU stock, considering it to be very overvalued now.

Roku Business News

Roku has opened an office in Amsterdam to support its international growth plans, a top key priority.

In the European market, Roku has offices now in Denmark, the United Kingdom, and Ukraine. Still, Roku streaming players are currently available in the UK, Germany, and France, not in other European countries.

In late November 2021, Roku announced it had become the number one TV streaming platform in Mexico.

Another positive development is news that Roku and Google have agreed to a multi-year extension for both YouTube and YouTube TV to remain on Roku’s platform after a severe dispute between the two companies that lasted for months.

Third Quarter 2021 Financial Results: Beat on EPS, Miss on Revenue

ROKU stock earnings are highly volatile.

In Q3 2021, Roku had a beat on EPS GAAP but a miss on revenue. EPS of $0.48 was much higher than the consensus of $0.06, but revenue of ~$680 million was lower by ~$0.82 million compared to the estimate.

Roku delivered a solid quarter with very positive news. Some of the highlights include an ARPU (average revenue per user)

of $40.10, the highest figure in the past five consecutive quarters. Total net revenue grew 51% to $680 million on a year-over-year basis, Platform revenue grew 82% to $583 million, and gross profit rose 69% to $364 million.

Turning to another key metric, active accounts reported were 56.4 million, a net increase of 1.3 million active accounts from Q2 2021. However, there has been a deceleration in active accounts growth over the past five consecutive quarters, and this is not good news. As a comparison, in Q4 2020, Roku added 5.2 million active accounts.

There was a mixed report for total net revenue on a year-over-year basis, as Platform revenue increased 82% and Player revenue declined 26%. Total operating expenses and income from operations grew 45% and 475%, respectively, year-over-year.

Fundamentals: Strong Financial Position

Roku has a strong balance sheet, with a debt/equity ratio of 0.07 for Fiscal Year 2020 and 0.03 per the latest quarter. With cash and cash equivalents of $2.18 billion on its balance sheet on September 30, 2021, and a positive free cash flow of $94.6 million, Roku has succeeded a milestone of not only making a profit in the past five consecutive quarters but also having delivered a strong business performance.

Not everything is bright, though. Shareholders have been diluted in the past year, with total shares outstanding growing by 5.9%.

The firm stated this about its outlook: “Looking ahead, our business fundamentals remain strong, but we are mindful that the challenges created by the global supply chain disruptions will likely continue into 2022. These headwinds may have a broad impact on the holiday season in terms of consumer confidence, product pricing, and availability, and advertising spend levels.”

Valuation: Too Pricey Entering 2022

Roku remains a growth stock with an expected three-to-five-year EPS growth of 49.05%.

However, its PEG ratio of 3.1x suggests it is not cheap. On a relative valuation, ROKU stock is overvalued based on its P/E ratio of 107.2x compared to the U.S. entertainment industry average of 34.5x and based on its P/B ratio of 11.4x compared to the U.S. entertainment industry average of 2.5x.

Its forward GAAP P/E ratio of 146.9x versus the communication services sector median value of 20.7x signals a very large premium.

Wall Street’s Take

Turning to Wall Street, Roku has a Moderate Buy consensus rating, based on sixteen Buys, two Holds, and two Sells ratings assigned in the past three months. The average Roku price target of $362.11 implies 55.4% upside potential.

Download the TipRanks mobile app now, available on iOS and Android.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

Tired of arriving late to the Big Returns Party?​
Most investors don’t have major gainers like TSLA or NVDA on their radar from the start.
The profusion of opinions on social media and financial blogs makes it impossible to distinguish between real growth potential and pure hype.
​​For the past decade, we have developed and perfected technology designed to help private investors, just like you, find the best opportunities, with the greatest upside potential, in any financial climate.​
Learn More