- Roku reported better than expected results.
- Results were not good enough as the company showed a clear deceleration for active accounts and streaming hours.
- Roku is in a very competitive market and faces a big growth question.
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Roku (NASDAQ:ROKU) shares are tumbling on August 5 following earnings and revenue that topped consensus estimates. Revenue came in at $645.1 million, which was 4% better than expected but missed the street high estimate of $648.6 million. Meanwhile, earnings of $0.52 per share easily topped the forecast for $0.13.
Guidance was solid, with revenue forecast at $680 million for the third quarter and better than forecast for $648 million, but missing the street high estimate of $703 million. Additionally, the company reported a significant deceleration for active account additions and a decline in streaming hours.
Not Good Enough
The results, although strong, are not good enough for a stock that carries a market cap of nearly $56 billion and trades with a premium valuation, like 10.8 times 2023 price to sales, or 63.5 times 2023 EV/EBITDA estimates. These are extremely high multiples, and it is even more troubling when some of the company's key growth metrics, such as the number of active account additions, slows significantly while posting its first sequential decline in streaming hours.
Streaming hours declined sequentially by almost 5% and grew by just 19% year over year. These metrics suggest that the time people spent in front of their TV dropped dramatically. While one can assume it is due to an easing of the pandemic and because viewers were going out more, what we find is that it is actually a resumption of the decelerating pre-pandemic trend.
Streaming hour growth was slowing before the pandemic, and that growth rate merely had a bump higher due to the pandemic. It seems entirely possible that the growth in streaming hours will only continue to decline in future quarters.
But more concerning is the steep decline for active account growth because, like streaming hours, it seems it has just simply resumed its decelerating growth trend that began before the pandemic started. Of course, the question is how much growth was pulled forward by the pandemic and how much slower will active account additions get in future quarters.
Roku's biggest problem is a very competitive industry with multiple competing streaming players on the market. This, coupled with a market that could be nearing saturation, will likely be problematic for the company. Consider that Netflix (NFLX) has around 210 million global subscribers and that Roku has nearly 52 million active accounts. Coupled with Amazon (AMZN), which as of the fourth quarter of 2020 had more than 50 million active users on its Fire TV, while Android TV OS reaches more than 80 million monthly active accounts, you must assume that Roku's growth path moving forward only gets harder not easier. Then, of course, there is Netflix which is growing at its slowest pace since before 2017. Additionally, Netflix's efforts have appeared to turn to attracting mobile users to its product, which means these users do not even use a product like Roku.
Will The Stock Grow Into Its Valuation?
Overall, the question remains whether the company will grow into the valuation the market has decided to give the stock. At a price per share of nearly $395, the company would need to earn $3.95 by 2023 to have a PE ratio of 100 or grow to $7.90 per share by 2024 to trade at 50 times earnings. Analysts currently estimate earnings in 2023 of $2.84 per share to $5.06 per share in 2024. Anything is possible, but for that to happen, the company will need to continue adding active accounts and have the existing accounts remain active enough to grow ARPU to higher levels.
Currently, revenue growth is expected to decelerate in 2022 to 38% and then slow further in 2023 and 2023, to 34 and 29.3%, respectively. Meanwhile, earnings to reach the numbers noted above will need to double from 2023 to 2024 and rise from an estimated street-high of $3.08 per share in 2022. That means that when revenue growth is expected to slow, earnings are expected to grow even faster, meaning the only way the company can do that is by getting ARPU to grow at a faster pace or by expanding margins.
The key here is if people spend less time watching TV at home, and those growth trends continue to decelerate along with the active account growth slowing, it will be hard for the fundamentals to catch up to the stock's valuation. In fact, it seems apparent that growth has been pulled forward by quite a bit, and the company could continue to see a deceleration in key metrics in future quarters, making it very difficult to reach the earnings need to justify its current valuation.
The technical are weak and show that the stock was unable to break out to a new high before results and is forming what could ultimately prove to be a very bearish double top pattern and a major reversal of the trend. The relative strength index and the MACD are trending lower, suggesting a major loss of momentum in the stock.
The stock managed to find some initial support around $385, but that is unlikely to hold, and the shares are more likely to revisit the lows of April of around $300 over the near term.
It seems more likely that Roku's growth only slows from here, which will be a big problem for the stock going forward.
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This article was written by
Mott Capital, aka Michael Kramer, is a former buy-side trader, analyst, and portfolio manager with 30 years of experience tracking market fundamentals. He focuses on long-only macro themes and studies trends and unusual options activities to identify long-term thematic growth opportunities.He leads the investing group Learn more .
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