Roku: Attractively Priced Growth Stock

Summary:

• Roku reported a 17% growth in active accounts and a 20% increase in streaming hours in Q1, but saw a 5% decline in average revenue per user.
• The company is on track to achieve adjusted EBITDA profitability by FY 2024, with a current valuation of 2.2X forward price-to-revenue ratio.
• Despite the decline in monetization metrics, Roku’s potential in the streaming and advertising markets makes it undervalued compared to Netflix.

Roku (NASDAQ:ROKU) has seen continual active account acquisition momentum and growth in engagement in the first-quarter. Unfortunately, the streaming platform also saw a weakening of its monetization metrics which has been expressed as a decline in Roku’s average revenue per user. While the company also posted negative EBITDA margins for Q1’23, the company has guided for positive adjusted EBITDA in FY 2024. Since Roku is still growing its customer base and seeing encouraging engagement trends on its the streaming platform, I believe concerns over Roku’s growth trajectory are overblown. While shares are not cheap, I believe the market currently undervalues Roku’s potential in the streaming/advertising markets!

Roku is still a growth stock, despite seeing a deterioration in its key monetization figure ARPU

Streaming company Roku reported 17% growth in its most important performance metric “active accounts” in the first-quarter: Roku had 71.6M active accounts on its platform at the end of the first-quarter, meaning the firm added 1.6M new accounts since the end of FY 2022. Streaming hours, which is another key performance metric for Roku, increased 20% year over year to a record 25.1B hours streamed, showing that the Roku platform continues to achieve high engagement from its customer base. On the negative side, Roku suffered a 5% decline in its monetization metric, average revenue per user, which dropped to $40.67. It was the second straight decline in Roku’s average revenue per user metric and it indicates growing profitability challenges, despite overall active accounts growing.

Actual Results	Q1’23	Q4’22	Q3’22	Q2’22	Q1’22	Growth Y/Y
Active Accounts (millions)	71.6	70.0	65.4	63.1	61.3	17%
Streaming Hours (billions)	25.1	23.9	21.9	20.7	20.9	20%
Average Revenue Per User/ARPU ($)	$40.67	$41.68	$44.25	$44.10	$42.91	-5%

Click to enlarge

(Source: Author)

Roku is facing a number of challenges, but also opportunities, especially in the digital advertising market. Roku’s top line growth has moderated significantly in recent quarters as people returned to work after the pandemic and streaming platforms lost the COVID-19 induced momentum. Roku’s top line growth fell to just 1% in Q1’23.

Roku has said that was laying off 6% of its workforce earlier this year in order to account for the fact that its growth is slowing. Roku has also guided for positive adjusted EBITDA in FY 2024 which is a target that the streaming company confirmed in its first-quarter earnings release.

Additionally, cord-cutting trends are expected to continue which should help streaming companies achieve not only market share gains, at the expense of Pay TV providers, but also should lead to continual customer acquisition momentum. With customer engagement on the Roku platform growing, I believe long term trends of cord-cutting fundamentally support Roku’s expansion.

On track to adjusted EBITDA profitability

One big catalyst for Roku’s shares is that the streaming company is working towards achieving adjusted EBITDA profitability. In the first-quarter, Roku reported an adjusted EBITDA of $(69.1)M and the second-quarter outlook calls for an adjusted EBITDA of ($75)M… so investors are likely to still see steep losses this year. If Roku achieves positive EBITDA next year through cost cuts, growth in digital advertising and account growth, shares of Roku could go into a new up-leg!

Roku’s valuation

Roku has been highly valued in the past because of the company’s potential in the streaming and digital advertising markets and Roku has achieved a higher valuation that Netflix (NFLX)… in part because Roku grew faster than Netflix.

This changed, however, in 2022 which is when Roku’s slowing top line growth has started to weigh on the company’s valuation factor and Netflix became the more highly valued streaming company again.

Right now, Roku is valued at a forward price-to-revenue ratio of 2.2X while Netflix achieves a much higher valuation factor of 4.7X revenues… meaning Netflix’s potential in the streaming market is more than twice as expensive as Roku’s.

I believe Roku is undervalued relative to Netflix, largely because Roku continues to add millions of users to its streaming platform which allows the firm to grow its monetization opportunities, especially in the digital advertising market.

Risks with Roku

Roku continues to add a decent number of active accounts to its streaming platform, although it must be acknowledged that the company’s top line growth has slowed drastically. The decline in monetization metrics, as expressed by average revenue per user figure, is a problem, too. What would change my mind about Roku is if the streaming company saw negative top line growth, reported sequential declines in ARPU and pushed its EBITDA profitability goal further out into the future.

Final thoughts

Roku is still a growth stock as the company continues to attract customers to its streaming platform. Unfortunately, Roku faces profitability challenges as consumers have been proven to be less willing to spend on the Roku’s services. While I believe that Roku benefits profoundly from cord-cutting trends in the core U.S. market, the risks have undoubtedly increased. As long as Roku adds new accounts to its platform and sticks to its EBITDA profitability goal for FY 2024, I believe the company’s shares could close the valuation gap relative to Netflix!

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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.

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