Not all Streaming Players Are Created Equal

A favorite momentum name amongst traders, ROKU, consistently pulls in over 500 pageviews a month by financial pros. While that may not seem like much currently, it’s usually more than Netflix and Disney, both of which happen to have garnered more attention recently, and not for good reasons.

Netflix (NFLX) shocked investors when it reported that it’s now losing global subscribers, and may lose up to 2 million by Q2 2022. 

However, Disney (DIS) actually saw its numbers improve:

– Disney+ paid subscribers: 137.7M v 129.8M q/q v 135Me

– ESPN+ paid subscribers: 22.3M v 13.8M y/y

– Total Hulu subscribers 45.6M v 41.6M y/y

While customers are fleeing Netflix, they are finding homes with other streamers. One of those is Roku (ROKU). 

Much like NVIDIA (NVDA), Roku reimagined itself, undergoing significant transformation.

That’s helped the company experience explosive revenue growth in the last few years.

But is that enough to make it a decent investment?

Roku  (ROKU) Business

ROKU operates a TV streaming platform. The firm operates in two segments: Platform and Player. Its platform gives customers access to movies, TV shows, live sports, news, and music. 

As of Q1, 2022, Roku had 61.3 million active accounts. 

Roku provides digital and video advertising, content distribution, subscription, and billing services, brand sponsorship, and promotions. It licenses smart TVs under the Roku TV name. 

Furthermore, ROKU offers streaming players, audio products, and accessories under the Roku brand name, and sells branded channel buttons on remote controls. 

Its products can be purchased via retailers, distributors, direct-to-consumers, and online. 

The Roku operating system was the number 1 selling TV OS in the U.S. during Q1 2022. 

The Roku channel ranked in the top 5 on the Roku platform in the U.S. by reach and engagement. 

In addition, ROKU is the number 1 streaming platform by hours streamed in the U.S., Canada, and Mexico. Globally, customers consumed 20.9 billion streaming hours in Q1 of this year. 

ROKU is the first to develop an advertising watermark, which enables publishers, advertisers, and technology providers to validate the authenticity of video ads on the Roku platform.  

Financials

ROKU continues to grow at a rapid pace. The firm did $1.77 billion in revenues in 2020, and in 2021, it did $2.76 billion. 

Total net revenue grew 28% YoY to $734 million in Q1 2022. Furthermore, platform revenue increased 39% YoY to $647 million in Q1 2022. 

What is impressive to see from ROKU is its gross margins are improving as its revenues are growing. 

For example, in 2021, the firm’s gross margins were 51% as it did $2.76 billion in revenue, much better than in 2020 when gross margins were 45.4% and revenue stood at 45.4%

Better yet, the firm’s free cash flow improved from $66 million in 2020 to $188 million in 2021. 

ROKU has a current ratio of 4.19x. Its highly liquid assets are 4.19x greater than its short-term liabilities. 

It has a quick ratio of 3.97x, which means its highly liquid assets are 3.97X greater than its short-term liabilities. 

The company has a debt-to-equity ratio of 0.17x and capital structure for ROKU is as follows: total debt of $576 million and cash upwards of $2.24 billion, and a market cap of approximately $11.9 billion. 

Valuation

ROKU has a price-to-sales ratio of 3.85X, which is above the sector median of 1.37X

The firm has a P/E GAAP (TTM) of 83.72, which is significantly higher than the sector median of 17.08

ROKU has experienced revenue growth of 43.9% YoY, which is much better than the sector median of 11.75%

Now, one knock on ROKU is its enterprise to EBITDA at 32.54x, which is well above the sector median of 10.04x.

But the hardest pill to swallow is the price to cash flow ratio of 49x over the last 12 months and a forward cash flow of 126x.

Our Opinion – 4/10

ROKU is a great company with a wide reach. However, since investors have turned towards value-oriented companies, we believe that ROKU will continue to struggle in this environment. 

The firm has a high price-to-sales ratio and EV/EBITDA, which is not attractive in this market. Plus, it’s expecting cash flows to decrease next year.

And because of that, we believe this stock should be avoided for the next two quarters and revisited near the end of the year.