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Roku: Drawdown Presents A Buying Opportunity

May 06, 2021 8:00 AM ETRoku, Inc. (ROKU) Stock32 Comments
The Abstract Investor profile picture
The Abstract Investor


  • Roku has seen a large drawdown from a peak in February; the stock has become cheaper with little change in growth prospects.
  • YouTube TV has little impact on the fundamentals considering its small subscription base.
  • CTV Ad Spend has been outpacing expectations; 2021 is an extension of the shift in advertising away from traditional TV to CTV; Roku is riding a tide that's still rising.
  • At an NTM EV/S of 16.3x, ROKU is attractively valued as an entry point. I'm long ROKU.

VOD service on television. TV streaming concept
Photo by simpson33/iStock via Getty Images

I last published an article in late January, when Roku (NASDAQ:ROKU) was trading at ~$400, calling it a long-term "buy and hold". Well, the fundamentals haven't changed much and the stock is now significantly cheaper after recent selloffs. There's a 25% upside from $320 to get

This article was written by

The Abstract Investor profile picture
I pick growth stocks that benefit from transformational trends in technology and culture globally....Such trends can be digital transformation, demand for parallel processing computing power, e-sports consumption, adoption of solar energy, and digital banking amongst others. I tend to cast a wide net in order to be opportunistic and filter down to only the best stocks for a deeper dive analysis. My investment process is fundamentals-driven, bottom-up research, and I look for companies with innovative products/solutions, strong management teams, and category leaders with wide competitive moats....I've previously worked as an analyst at a financial services consultancy catering to the asset management industry. My role was to research disruptive growth stocks across the Internet, Software, Fintech, and Semiconductor Industries and make recommendations for a hedge fund client.I hold a Masters in Applied Finance from Singapore Management University and a Masters in Engineering from Imperial College London.

Analyst’s Disclosure: I am/we are long ROKU. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (32)

YouTube is the largest TV network. $15 billion in revenue and 10% of Alphabet. It is an important channel to make Roku an attractive choice for many viewers. That said, I’m a devout Roku user and am long on ROKU.
Simarjeet S Tuli profile picture
The headwinds combined with tailwinds will still be underwhelming in second half of CY 2021 as the robust growth in 2HCY 2020 will not allow any room for topline numbers to grow beyond the %pace of YoY numbers, though strong gross profit growth is expected to outpace operating expense (OPEX) growth, resulting in Q2 Adjusted EBITDA of $65 million at the midpoint. Litmus test for the financials will start to testify the stock only from 2H CY 2021, it's a wait n watch game for now, I believe as strong comps of second half of 2020 will have to be outpaced only then we can see another Netflixing potential for Roku
What the heck is CTV?
The Abstract Investor profile picture
@luffyman Connected TV. Alternatively streaming-based TV. Industry lingo. Sorry about that, should’ve put it in the article. I've requested for it to be added in.
@The Abstract Investor Thanks. I’m trying to understand how Roku makes money on advertising. I use a stand-alone Roku device and don’t notice any ads. Ever. Maybe their ads are so unobtrusive that I don’t even notice them. But that can be good and bad. So where are they? Are they pop-ups? Are they video ads? Or does Roku share revenue with channels that run advertisements within their channels?
The Abstract Investor profile picture
I gave a fairly thorough explanation of the business model here:
That article should provide a strong overview of how the company makes its money. It's a complicated system of different stakeholders and I tried to shed light on the relationships between everyone and what drives sales.

Most of the ads are run on ad-supported video-on-demand channels like the Roku Channel. It's not going to be on Netflix & Prime since those are vanilla subscription channels. So it depends on what you're watching. It's been relatively unobtrusive but it'll probably get more annoying soon. Sometimes they offer banner ads in the home interface; other more unique aspects include the branding on the Roku remote buttons.
Daytrader77 profile picture
Only 0.19% of shares are held by all insiders..

That says a lot about how insanely the valuation in this company.

It's like a hot potato.. they don't want to own it.
@Daytrader77 "Only 0.19% of shares are held by all insiders.."

@Daytrader77 Insiders own 0.19%? Where did you come up with that? Anthony Wood owns over 19.3 million shares, 83,000 "A" shares and 19.273 million "B" shares per the 2021 proxy; that is roughly 15% of the shares outstanding. Even Scott Rosenburg (SVP & GM, Platform Business) owns over twice the 0.19% quoted above.
Timrio profile picture
@Snowplow Daytrader77 just likes to make Sh@&$t up and thinks no one here will call him on it.
Crayfishkaliari profile picture
Not sold tech spec isnt going lower but definitely getting into roku
augmented reality profile picture
Q1 2021 Highlights. EPS beats by $0.67, beats on revenue
• Total net revenue grew 79% year-over-year (YoY) to $574.2 million;
• Platform revenue increased 101% YoY to $466.5 million;
• Gross profit was up 132% YoY to $326.8 million;
• Roku added 2.4 million incremental Active Accounts in Q1 2021 to reach 53.6 million;
• Streaming Hours increased by 1.4 billion hours over last quarter to 18.3 billion;
• Average Revenue Per User (ARPU) grew to $32.14 (trailing 12-month basis), up 32% YoY;
• Raised approximately $1 billion through an At-The-Market (ATM) stock offering
The Abstract Investor profile picture
@augmented reality ...and the flywheel keeps spinning. Great quarter, expectedly beating analyst expectations and then some. Morgan Stanley might even have to even raise their lagging indicator of a PT now.
augmented reality profile picture
@The Abstract Investor why all the PT downgrades ?
@augmented reality My guess is a reflection of the recent change in the market where investors are adjusting interest rate expectations and the sell-offs we have seen in many companies trading at 15-20-30 times revenue.
awesome stock. its still on a 300 percent run since before the pandemic. this is just noise from bots steal shares cheap when the "reopening stocks" inevitably crash and burn because their business models are toast. these bots are ai after all. you dont think they can just be set to steal more shares later? theres no humans making the decision to sell roku at 300 dollars I can tell you that. you also have bs crypto stealing all our robinhood buyers.

Thanks for the article. im pulling the trigger on more soon.

bought roku in 40s on a crash like this years ago. bought it again on a crash like this before the pandemic. buying it a third time on this crash. roku ends up a winner every time. its like a wave that keeps getting bigger and bigger every time it goes back out to sea.
Aspiring Penguin profile picture

Roku is top 3 on my watchlist to add in this recent weakness.

market is behaving like a coked up maniac now. virus spread goes down, all tech stocks tank 10%. rates go up 0.1%, tech stocks tank 10%.

and fsly reports crap earnings, and somehow led to 10% drops in roku, ddog, crwd, roku, etc etc yesterday.

what i can say is - anyone selling quality tech stocks in this macro set-up - you are transferring your wealth to someone else.
@Aspiring Penguin - people are uninformed.
1. they think roku will fail against goog, aapl, firestick, etc. lots of volatility.
2. then, the pandemic hit. the smart people roku is dead and beat it down to $60. not sure why they thought this but they did.
3. then, the pandemic is getting better and the wise folks think it is a stay-at-home play and crush it once again.
4. each quarter roku beats on revenue and recently on eps proving the smart people wrong.
5. this cycle will happen again and again but some people just don't get their business model.

Timrio profile picture
@RockyCT I agree with everything you said except the description “smart people”.
right now it doesn't matter what kind of earnings growth companies post or sales/revenue increases or fwd upbeat guidance. They are all getting punished (even more if they guide conservative); and as another commenter stated on a yellen piece on this site, hedge fund managers seem to be moving to value (backlash to wall street bets?). So I agree roku stock has long term potential but fishing in the growth stock pond is difficult and nearly impossible to offset the risks until the dust settles. Just a fn by Jeremy Siegler who in late January early February this year predicted growth stocks would face tremendous pressure until the bond rate yields settle in the May July time frame. Man has he been spot on.

Renowned trader Mark Minivera also dead 'right , a hard penny market' to try to make money in. Lots of risk for little reward so bottom line right now all tech growth stocks are in a no fly zone (with all due respect to Kathy Wood@aark); especially if you have a short term horizon and need the cash within 1 to 3 years.
@1counselor I'm buying some of these suffering growth plays and immediately selling near term calls with 10-15% premiums. If they get called away, I make 15-20%. If they don't I bank the call premium and try again. Each time lowering my cost basis. Obviously, it fails if the stock really crumbles. Then I just have to wait it out or try to claw back to even. Either way, I'm not getting crushed...while at the same time limiting my upside to that 15-20% over 2-4 week periods. Just me. GLTA.
ROKU is a classic sell in May stock. ZOOM is doing the same thing. The market is pivoting away from stay at home stocks. JMHO.

I hope many took at least their seed money off the table at some point in ROKU. You make nothing unless you sell....at least some.
rdl747 profile picture
@InvestorMan Sr.

Roku benefited from the false perception it was a "stay at home stock" and now it's suffering from the downside as this pandemic nears an end.

Roku benefited from a pull forward effect during the pandemic, which accelerated what was happening anyway, but that growth continues. Unlike Zoom, for example, a company that will come back down to Earth. Roku was hoisted further up the ladder. But perception rules the day in the short term so the stock suffers.
@rdl747 - i agree. all the new users will be converted into more platform ad revenue. there is ~$200 billion in linear ad revenue that is going to make it's way to OTT platforms. this has nothing to do with the pandemic, interest rates, or whatever wall street wants to promote on a given day. this is a secular growth industry globally.
Timrio profile picture
@InvestorMan Sr. Not sure what your basing your classic sell in May comment on? Last year that would have been the biggest investing mistake of your lifetime. Doing the same this year could easily result in the same outcome as many are predicting $500+ by EOY.
Who Dat? profile picture
The air has been let out. I wouldn’t touch ROKU at this stage since the stock tends to be momentum play. Roku could retest $200 level.
riskybusinez profile picture
Great article! Long ROKU!
YouTube deal is up for renewal in December. Roku keeps pressing their luck with this nonsense.
Who Dat? profile picture
I have TCL HDTV. I dont' watch YT videos on my TCL/ROKU because the remote navigation is too complicated and slow. I prefer to watch YT on my iPad where I can quickly and easily pause, fast forward, rewind, replay, etc. On the side bar, I get to see what other videos I can be watching iPad vs watching YT on my TCL/ROKU.

It is completely different user experiences.
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