Roku (NASDAQ:ROKU) stock appears to have turned the corner after its Q3 report last week, rising 40% over the past five trading days. There was a lot to like about Roku’s numbers. Revenues came in at $912 million, up 20% from last year and well ahead of the roughly $860 million consensus estimate. The market for video advertising has shown signs of rebounding, after a tough two quarters, with Roku also seeing higher content distribution sales. Platform revenue increased by 18% versus last year. Roku also added more new users than expected, 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 more than offset a 7% decline in average revenue per subscriber. On the hardware front, Roku is seeing strong usage of its Roku-branded TVs, which launched earlier this year, with the sets accounting for a larger share of network additions compared to the company’s streaming boxes in international markets during the last quarter. Investors are also likely to be pleased with the performance of Roku’s proprietary streaming offering, the Roku Channel. In Q3, the company reported a remarkable increase of more than 50% in streaming hours on the channel compared to 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 seen in 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 rapidly increasing operating expenses especially related to sales and marketing have been a major concern for investors. However, the company has made some progress in recent quarters with cost management. For example, for Q4 the company predicts year-over-year growth in operating expenses will come in the negative mid-teens, marking a significant improvement over year-over-year growth of approximately 70% in Q4 2022. The company seems 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 use of office space.
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, versus an increase of around 15% for the S&P 500 over this approximately 3 .-year period. However, the decline in ROKU stock was far from consistent. Returns for the stock were -31% in 2021, -82% in 2022, and 104% in 2023 (YTD). By comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating that ROKU underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – it’s been tough over the past few years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA and TM, and even for the mega-cap stars GOOG, MSFT and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 every year during the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less roller coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and high interest rates, could ROKU face a similar situation as it did in 2021 and 2022 and underperforms the S&P over the next 12 months – or will it see a recovery?
So is Roku stock still a good value at current levels of around $85 per share? The secular trend of ad dollars moving away from linear TV to digital video formats is likely to benefit Roku. The stock also trades at about 3.5x forward earnings, which is well below levels of more than 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 Rock Rating: Expensive or Inexpensive for more details on what’s driving our price estimate for the stock.
returns | Nov 2023 MTD (1) |
2023 YTD (1) |
2017-23 Total (2) |
ROCK Come back | 39% | 104% | 60% |
S&P 500 Return | 4% | 14% | 96% |
Hit Enhanced Value Portfolio | 3% | 21% | 521% |