Shares of ROKU: Huge Value or Lost Cause?

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The number #1 operating system in smart TV in the U.S. is made by Roku (ROKU). 

But with the economy showing signs of weakness throughout 2022, and companies cutting down on their advertising expenses, it has put a significant amount of pressure on Roku’s stock. 

Shares are down more than 64% YTD. 

Believe it or not, that’s well off its lows.

When the company reported earnings recently, shares took a faceplant.

Yet, they’ve managed to rally more than 33% off those lows.

That’s brought in a ton of interest, as searches by financial pros put ROKU as the #4 communication services stock, barely behind Trinity Capital, AT&T, and Verizon.

So, are shares an incredible value or a lost cause?

Check out our thoughts on Roku below, and whether we think it’s a buy or sell at these levels.   

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Roku (ROKU) Business

Roku operates a TV streaming platform with two segments Platform and Player. 

Its platform allows users to access movies, TV shows, live sports, news, and music. 

According to the firm’s latest Q2 quarterly report, Roku added 1.8 million incremental active accounts to reach 63.1 million. 

The company offers digital and video advertising, content distribution, subscription, and billing services, brand sponsorship, and promotions as a means to generate revenue. It even licenses Smart TVs under the Roku TV name. 

In addition, Roku offers streaming players, audio products, and accessories under the Roku brand and sells branded channel buttons on remote controls. Roku products can be purchased through retailers, distributors, direct-to-consumers, and online.

In Q2, the ROKU operating system (OS) remained the number #1 smart TV in the U.S.

Furthermore, ROKU users streamed 20.7 billion hours in Q2, an increase of 19% YoY. It 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

Despite a slowdown in the economy, ROKU is on pace to have its best year in terms of revenues. 

The firm reported in Q2 that its net revenue grew 18% YoY to $764 million.

However, they were hit with slowdown in TV advertising spending due to the weakness in the economy. In response, they’ve taken steps to slow down operating expenses and headcount growth.

Additionally, the company ate many of the inflation costs and supply chain issues for its hardware to gain market share.

That’s why the company focuses more on platform than hardware revenue.

Gross margins have remained steady at 48.09% (TTM), which is a good sign given all the economic headwind. 

ROKU is cash flow positive. It has $73.3 million in operating cash flow (TTM). In addition, Roku has a current ratio of 3.59x, which means it is well than enough assets to cover its short-term liabilities.

The capital structure for ROKU is as follows:  total debt of $721.32 million, and cash of upwards of $2.05 billion, with a market cap of $11.2 billion. 

Valuation

ROKU is not a profitable business. While its gross profit margin lands at 48%, its operating margin (ttm) is -1.23%. SG&A drives the majority of the non-direct costs, accounting for nearly 30% of revenues.

The firm’s price-to-sales ratio is still relatively high at 3.61x, despite the massive correction we’ve seen in the stock price in 2022. 

Additionally, the price to cash flow ratio is extremely high, meaning the company generates little cash relative to its share price.

Growth

Roku is still growing revenues, although not nearly as fast as it has in years past. Its revenue growth (YoY) is at 31.3%, but it’s forward revenue growth is at 28.8%. 

And while its EBITDA growth (YoY) is a dreadful -41.64%, it is expected to improve. Its forward EBITDA growth is -28.12%

Profitability

High gross profit margins is one of the reasons investors flocked to Roku, which is still the case today, at 48%. However, a negative net income margin of -1.51%, and and a negative -1.72% return on equity is not something investors want to see when the economy is slowing down.

Our Opinion 6/10

Roku is a leader in its niche. This is important because it has value, regardless of where its stock price is trading. In other words, we believe that the company will weather the storm, and eventually reward shareholders. Shares have popped 31% from their 52-week lows, but we would be buyers on any weakness. 

The company expects things to be slow, which gives investors time to add shares to their portfolio without having to rush in right away.