Roku Is A Buy Again
- Stock past key lockup expiration.
- Valuation much better at these levels.
- Short squeeze potential remains.
One month ago, I detailed how the biggest hurdle for Roku (NASDAQ:ROKU) was coming in just a few weeks. The last week of March was when the 180-day IPO lockup expiration date was coming, and this could potentially lead to a large number of insider sales. Now that we've past that time period and shares have taken another leg down, it seems like a good time for investors to get back into the name.
While we have seen some insider sales after the lockup expired, there haven't been any so far from the CEO and founder Anthony Wood, which is a positive in my opinion. We have seen some distributions from funds to their partners, but that happens quite often. We also have not heard any big news from major holders that they are giving up on the name. There will be dilution coming, but this is a risk that's been on the table all along.
The second reason why I'm more positive now is valuation. In my original article on the name, I argued why Roku could eventually be worth between $4.25 billion and $8.5 billion. That was based on Roku being valued at 5-10% of Netflix (NFLX) at $85 billion, and now the streaming giant is worth more than $127 billion. While Roku shot up dramatically after its first earnings report, it has lost nearly half of its value since the peak. With a market cap under $3.1 billion on Friday afternoon, my valuation for the name, even if I don't adjust for Netflix's surge, again represents considerable upside.
(Source: Yahoo! Finance)
The growth story is still intact, as evidenced by the latest earnings report. Platform revenues are surging, which helps gross margins increase as they become a larger part of the overall total. The company actually reported a GAAP profit in Q4, although, I expect more losses to come this year as gross profits are reinvested to grow the business. Active accounts jumped by nearly 6 million in 2017, growth of 44% while streaming hours and average revenues per user continue to climb quarter after quarter.
As you can see below, short interest has steadily climbed over time in this name, reaching almost 50% of the float and outstanding share count that was reported most recently. With the stock down about $20 since the Q4 report, a good report in the coming weeks likely could lead to a short squeeze, helping the name to recover some of its losses.
(Source: NASDAQ Roku short interest page)
In the end, I think it is time for investors to look at Roku again. While I thought the surge to nearly $60 was a bit too far, too fast, shares have lost almost half of their value since. For a company that continues to grow its user base at a strong clip, I think the name is extremely undervalued for the long term while trading for less than 2.5% of what Netflix is valued at. As the overall market settles down a bit and Roku announces more strong results, I think the name will rebound quite a bit.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ROKU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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