Roku (NASDAQ: ROKU) is one of the largest companies in the streaming space, valued at a market cap of $45 billion. Roku stock went public in September 2017 and has since gained 1,160% in cumulative returns, easily crushing the broader market. Despite these stellar gains, Roku is also trading 30% below its all-time highs. Let’s see if this pullback makes Roku a good buy at current prices.
The bull case for Roku
The COVID-19 pandemic acted as a massive tailwind for online streaming companies including Roku. In fact, Roku’s sales rose from $1.12 billion in 2019 to $1.78 billion in 2020, while its gross profits rose from $495 million to $808 million in this period.
The cord-cutting phenomenon continues to positively impact streaming players as 6.6 million households in the U.S. cut cable subscriptions in 2020. Further, Roku is also poised to benefit as competition in the streaming vertical gains pace due to its leadership as a content aggregator.
Over the years, Roku’s platform business that includes ad revenue has expanded at a rapid pace and now accounts for the majority of sales. Roku generates ad revenue by selling publishers’ inventory, third-party subscriptions, display ads as well as deals with TV manufacturers.
In Q2, platform sales stood at $532 million while hardware sales were much lower at $112.8 million. Platform revenue is also highly accretive to Roku’s profit margins with a gross margin of 64.8%. Comparatively, its player gross margin stood at a negative 5.9% in Q2.
The number of active accounts stood at 55.1 million in Q2, up 28% year over year and average revenue per user rose by 46% to $36.46, which indicates an increase in customer spending.
The bear case for Roku
Investors remain concerned over the steep valuation of Roku stock. Its forward price to 2021 sales multiple stands at 16x while its price to earnings multiple of 262x is also sky-high. The valuations of the broader markets are extremely frothy given a sluggish macro-environment, rising inflation rates, and the prospects of higher interest rates. In case these factors trigger a sell-off, Roku stock will lose significant momentum.
Further, Roku remains unprofitable on a GAAP basis which is another near-term headwind for the stock.
So, should I buy Roku stock?
Roku’s international expansion is still at an early stage giving it enough room to grow top-line in the future. Similar to other tech stocks, Roku will also benefit from high operating leverage and improve profit margins going forward. Its foray into original content creation will be a key revenue driver for the firm which will also increase customer engagement on the Roku platform, making it a top bet right now.
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What’s Roku’s average price target
Analysts tracking Roku stock have a 12-month average price target price of $460
Does Roku stock pay dividends?
No, Roku does not pay any dividends
How many active accounts does Roku have?
Roku ended the second quarter with 55.1 million active accounts
Contributing Writer at MyWallSt
Aditya took an interest in the stock market during the financial crash of 2008-09. His favorite stocks include Roku and Apple as both companies enjoy a leadership position in their respective verticals and are poised to beat the broader markets consistently going forward.