Roku: Buy The Drop Before Earnings
Summary
- Roku went through a 35% drop in pricing since July.
- Roku benefits from a shift to streaming TV and will continue to grow rapidly.
- Roku has more potential than Netflix and is growing faster.
Michael Vi/iStock Editorial via Getty Images
Shares of Roku (NASDAQ:ROKU) face a fresh catalyst this week when the streaming service provider is set to open up its books for the third-quarter tomorrow. Buyers can look forward to improving user monetization, rising average revenues per user and strong account growth!
Strong commercial performance and user monetization
Roku has reliably delivered strong earnings cards in the past. The streaming company, which is in direct competition for streaming accounts with the likes of Netflix (NFLX) and Disney (DIS), has seen an acceleration of growth during the Coronavirus pandemic of 2020. The pandemic also accelerated the shift from TV to streaming services, benefiting Roku and its distribution model. The reopening of the economy and the easing of stay-at-home restrictions, however, raised concerns over slowing account growth on Roku's platform.
In the second-quarter, Roku generated $532.3M in platform revenues, showing 117% year over year growth. Total revenues accelerated to $645.1M - not a new record - but the 81% revenue growth rate was still impressive. Roku's platform gross margins were 64.8%, signifying an 8.2 PP improvement over the year-earlier period. Roku is growing and becoming more profitable.
(Source: Roku)
Roku's revenues can be broken down into two key components: Account growth and ARPU. Roku's active accounts topped 55M in the second-quarter and the streaming platform added 1.5M new accounts in Q2'21. Active accounts are defined as accounts that have streamed content on Roku's platform within the last 30 days. The number of Roku's active accounts has steadily increased over time and hit an all time record in the second-quarter.
(Source: Statista)
Roku's account growth and engagement slowed a bit in the second-quarter, but year over year growth rates were still impressive. Active accounts posted a 28% year over year gain while average revenues per user, ARPU, a key platform metric for Roku, surged 46% year over year to $36.46. ARPU is a very important metric for streaming companies because it shows how content distribution and engagement translate into user monetization. Roku's ARPU accelerated during FY 2021, showing a growth rate of 32% in Q1'21 and 46% in Q2'21.
Q2'21 | Q1'21 | Q4'20 | Q3'20 | Q2'20 | Growth Y/Y | |
Active Accounts (millions) | 55.1 | 53.6 | 51.2 | 46.0 | 43.0 | 28% |
Streaming Hours (billions) | 17.4 | 18.3 | 17.0 | 14.8 | 14.6 | 19% |
Average-Revenue-Per-User/ARPU ($) | $36.46 | $32.14 | $28.76 | $27.00 | $24.92 | 46% |
(Source: Author, Roku)
For the third-quarter, I expect Roku to present a continuation of these trends. I estimate that the streaming service company will add another 5.5M active accounts to its platform in FY 2021; 1.6M in Q3'21 and 3.9M in Q4'21… the last quarter of the year is typically a very good one for customer acquisition. Regarding average revenues per user, I expect a total year over year growth rate surpassing 40% as Roku's growing distribution and acceleration of streaming TV adoption will fuel the firm's monetization. For Q3'21, I model 6% quarter over quarter growth in ARPU to $38.77.
Projections | Q4'21P | Q3'21P | Q2'21 | Q1'21 | Q4'20 | Growth Y/Y |
Active Accounts (millions) | 60.6 | 56.7 | 55.1 | 53.6 | 51.2 | 18% |
Streaming Hours (billions) | 19.2 | 17.7 | 17.4 | 18.3 | 17.0 | 13% |
Average-Revenue-Per-User/ARPU ($) | $40.74 | $38.77 | $36.46 | $32.14 | $28.76 | 42% |
(Source: Author)
Roku is set for a record quarter
Strong user account growth and higher ARPUs will show up in record revenues for Roku's third-quarter. The firm guided for revenues of $675 - $685M for the third-quarter. If Roku's third-quarter earnings card shows strong growth in active accounts, hours streamed and average revenues per user, the stock could get a much-needed boost.
Shares of Roku have fallen from a high at $490.76 in July to $317.72 on Monday. This represents a 35% drop in pricing over three months on concerns over slowing post-pandemic account growth and declining user engagement.
Roku is a better deal than Netflix due to faster sales growth
Netflix has been dominating the streaming games for more than a decade. The streaming firm counted 213.56M paying subscribers in the third-quarter and projected 222.06M paid memberships for the fourth-quarter. Year over year subscriber growth for Q3'21 and Q4'21 are around 9%… significantly below Roku's account growth rates of 28% (based off of Q3'21).
Roku had 55.1M active accounts in the third-quarter and I project that the number of active accounts can grow to 60.6M by year-end. Netflix is still about four times larger than Roku regarding subscriber base. Netflix's revenues in the third-quarter were $7.48B… which is eleven times larger than Roku's Q3'21 revenue forecast. There is also a big difference in equity and enterprise value between the two streaming platforms… the difference being that Netflix has a significantly larger valuation than Roku.
However, Roku is expected to grow sales at twice the rate Netflix is expected to grow. Higher growth expectations justify a higher valuation.
Roku | FY 2021 | FY 2022 | FY 2023 | Netflix | FY 2021 | FY 2022 | FY 2023 |
Sales | $2.84B | $3.87B | 5.11B | Sales | $29.70B | $34.13B | $39.11 |
YoY Growth | 59.45% | 36.60% | 32.05% | YoY Growth | 18.83% | 14.92% | 14.59% |
P-S Ratio | 14.95x | 10.95x | 8.29x | P-S Ratio | 10.16x | 8.84x | 7.71x |
EPS | $1.32 | $1.68 | $3.26 | EPS | $10.73 | $13.20 | $17.13 |
YoY Growth | - | 23.82% | 79.36% | YoY Growth | 76.49% | 23.00% | 29.77% |
P-E Ratio | 241.08x | 189.03x | 97.43x | P-E Ratio | 63.48x | 51.61x | 39.77x |
(Source: Seeking Alpha)
Risks with Roku
A slowdown in revenue and account growth, dropping user engagement and weaker customer monetization are risk factors that have the potential to put Roku's valuation under pressure. The firm will still grow its top lines in revenues and accounts in the third-quarter, but a more severe slowdown in these metrics would likely result in a lower sales multiplier factor for shares of Roku. ARPU is possibly the most important metric for Roku to track the platform's monetization success. If ARPU growth turns negative, which is not probable and not plausible, it would change my outlook on the stock.
Final thoughts
Roku is facing a fresh catalyst this week when the platform puts its earnings card for the third-quarter on the table. I believe we will see strong growth rates in accounts, streaming hours and ARPU due to Roku's increasing distribution. The stock is ready for a much needed boost and the platform, given its relatively small size relative to Netflix, has a lot of potential for long term growth in the streaming markets!
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ROKU either through stock ownership, options, or other derivatives. 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 (71)
I don't think the price recovers - if at all - before there is a positive news coming from their negotiations with Google.
In the meantime your loss tolerance may be really tested. I lost a value of a good lunch and a very good dinner before dumping R shares at $298.
Over ten years at the above rate, Wood will remove $153,635,680 million from the company he founded, resigned from, and then returned to, so that he might once again collect this gargantuan salary and keep ROKU's share price down for average investors like me.
This removal of large amounts of ROKU's annual income by Wood and other executives, creates volatility. Thus, we see ROKU's share price waffling by as much as $50 to $100 a share during a given quarter.For the third quarter of 2021, ROKU's revenues were $645.12 Million,
Net income was $73.47 Million. Investors were not impressed. Fundamentally, the math does NOT work. ROKU pays several other top executives millions of dollars annually. So, CEO and Executive Pay at ROKU is out of control.'Does high CEO pay matter to shareholders?' www.epi.org/...'Last month, we did an analysis that examined the impact of a provision of the Affordable Care Act limiting the amount of CEO pay that could be deducted from profits to $500,000.''In the years after it took effect, this provision raised the cost of CEO pay to employers (i.e., shareholders) by more than 50 percent. Prior to 2013, shareholders of health insurance companies effectively paid just 65 cents on every dollar of CEO compensation, since their taxes would fall by 35 cents for every dollar they paid out. After 2013, they would be paying 100 cents of every dollar.'