Roku Hit By The Collapse Of Silicon Valley Bank

Summary:

• Roku was reportedly among the “most exposed” customers of Silicon Valley Bank, as it held $487M of its deposits, which represented 26% of Roku’s cash holdings.
• However, the company doesn’t expect the impact to be material in its current ability to meet planned obligations.
• Despite that, investors will need to consider the valuation impact of its SVB deposit exposure, and losses should be reflected to be prudent.
• Should SVB’s fallout lead to financial turmoil, a delay in Roku’s recovery is all but certain.
• At an FY25 EBITDA of more than 35x, stay on the sidelines.

Roku, Inc. (NASDAQ:ROKU) joined some of the Silicon Valley Bank or SVB (SIVB) headlines recently as the bank of the “innovation economy” fell rapidly into a disastrous failure.

Accordingly, Roku reportedly was among the “most exposed firms” with a $487M exposure in SVB. It represented 26% of the company’s $1.9B total cash and equivalents as of 10 March 2023, a significant holding.

With some VCs and their portfolio companies pulling out their funds from SVB before it fell into receivership on Friday, has Roku attempted to divert its funds ahead of time?

The company’s filings did not disclose the reason for its significant exposure or what remedial actions were taken to reduce its exposure. However, management attempted to calm investors’ nerves as it highlighted:

(Our) existing cash and cash equivalents balance and cash flow from operations will be sufficient to meet (our) working capital, capital expenditures, and material cash requirements from known contractual obligations for the next twelve months and beyond. – Roku’s 8-K filings

However, the company also reminded investors that it “does not know to what extent it will be able to recover its cash on deposit at SVB.” With just $250K insured by the FDIC, it’s easy to see why most of its $487M is at risk.

Over the weekend, the media reported that banks and hedge funds “have offered bids ranging from 60 to 80 cents on the dollar for the deposits.”

Based on this range, the potential for loss suggests that between $97.4M to $194.8M of Roku’s exposure in SIVB might not be recovered.

Assuming we use the range’s midpoint ($146M), Roku’s cash and equivalents could fall to $1.75B, down about 8% from its reported balance.

We noted that Roku’s cash balance has fallen from $1.96B reported at the end of FY22. Assuming that its total debt (excluding convertible debt) is unchanged at $524M, Roku’s net cash would thus fall to $1.23B, suggesting a net cash per share of about $8.77, down from $10.26 observed for FQ4’22.

Thus, it represents a decline of about 14.5%, impacting its valuation further. However, with the situation evolving rapidly over the SIVB fallout, whether customers’ uninsured deposits would be made whole remains to be seen.

Also, the Fed and the FDIC are discussing a potential arrangement to backstop deposits on other banks that could potentially fail in a contagion spread following SVB’s failure.

Pershing Square founder Bill Ackman warned that more bank runs could happen from Monday as customers worry about the security of their funds.

The contagion has permeated as these SIVB’s customers face trouble making operating expenses and payroll. Hence, it’s still too early to determine the impact on Roku’s exposure in SIVB.

Based on Roku’s free cash flow or FCF estimates, the company should not have trouble meeting its obligations through FY25. While the company is expected to burn through $221.4B in 2023, it’s expected to turn FCF profitable from FY25.

Management also recently communicated that it’s confident meeting its FY24 adjusted EBITDA profitability. CEO Anthony Wood also assured investors that management is committed to “transitioning to focusing on profitability rather than just market share” and tuning down OpEx to “naturally expose the leverage in their business.”

Hence, we don’t believe that ROKU is at significant risk. But investors should expect more pain if the financial mayhem spreads further and the economy falls into a deeper recession.

With that in mind, we believe market operators will likely reassess ROKU’s valuation, parsing the impact on its SIVB exposure worsened by a potentially deeper recession if the financial fallout persists. Moreover, Wood stressed that “advertising is the biggest impediment to Roku’s revenue growth, as advertising is cyclical and is tied to the economy.”

We assessed that the market has likely reflected the potential recovery in Roku’s operating performance through FY24. Hence, if it’s further delayed due to a deeper downturn, investors need to be prepared for another steep collapse.

At an FY25 EBITDA multiple of 35.4x, ROKU is not a stock you want to buy now and hold through a potentially deep recession.

Rating: Hold (Reiterated).

Note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. Our cautious/speculative ratings carry a higher risk profile. They are only intended for sophisticated investors/traders. We urge new or inexperienced investors to avoid relying on such ratings. Moreover, investors must exercise prudence and devise appropriate risk management strategies, such as pre-defined stop-loss/profit-taking targets, within a suitable risk exposure.

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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.

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