ROKU with Nobias technology: Is Roku A Buy Down 53% From 52-Week Highs?
Roku has been a favorite pandemic play amongst investors. The social distancing measures that we saw put into place during the pandemic, which accelerated the growth of the “stay-at-home” stocks, was a big boon for Roku shares. However, 2021 has not been kind to Roku. The stock is currently down more than 53% from its all-time high of $490.76, and with that significant sell-off in mind, we wanted to see whether or not the credible authors that the Nobias algorithm tracks believe that this is a dip worth buying.
Patrick Seitz, a Nobias 4-star rated analyst, highlighted Roku’s business model in a recent article which was centered around the company’s third quarter earnings report. Regarding Roku’s operations, Seitz said: “The San Jose, Calif.-based company started as a unit of internet television network Netflix (NFLX), making the company's first set-top box. But Netflix decided it wanted to be hardware agnostic, so it divested the business in 2007.
After the divestiture, Roku kept making set-top boxes and added streaming sticks to allow consumers to access internet video services such as Netflix, Hulu and Amazon (AMZN) Prime Video. It later licensed its operating system to smart TV manufacturers.
ROKU Dec 2021
Today Roku gets most of its revenue selling advertising on its platform, including commercials for ad-supported services such as its own Roku Channel. Plus, it takes a share of pay-per-view and subscription revenue from third-party services sold through its platform. Roku stock is seen tied to the shift of television ad dollars to streaming from traditional broadcast and cable services.”
The cord-cutting phenomena continues to have strong secular tailwinds, so one would imagine that a major player in this space would be surrounded by position sentiment from the growth investing community, right? Well, for years, that was the case. ROKU shares rose more than 150% in 2020. However, the sell-off that shares have experienced since July has pushed its 2021 year-to-date returns down to -30.95%.
Concerns about slowing growth and therefore, an irrationally high valuation appear to be the major catalysts for ROKU’s recent share price weakness. Nicholas Rossolillo, a Nobias 5-star rated author who writes for The Motley Fool, recently published an article highlighting the stocks most recent leg down. Rossolillo touched upon the stock’s -9% move in late November which led to ROKU’s 52-week low, saying, “A sky-high valuation has drawn plenty of criticism, and even after the steep declines, shares still trade for 11 times trailing-12-month sales and 108 times trailing-12-month free cash flow.”
Operationally speaking, Rossolillo believes that Roku’s business is attractive. He said, “Stock price and pandemic aside, though, Roku is doing more than just fine. During the third quarter of 2021, active accounts grew 23% year over year to 56.4 million, and average revenue per user over the last 12 months was up 49% to $40.10. This builds on the massive boom the company reported this same period a year ago (revenue growth of 73% in Q3 2020), when early pandemic lockdowns sent Roku into the stratosphere.”
And therefore, after the stock’s recent sell-off, Rossolillo is bullish on shares, saying, “Though valuation remains high, Roku is beginning to turn a corner on profitability and is poised to start generating robust returns in the coming years. If you were thinking you missed the boat on this stock during the pandemic-fueled explosion higher, now could be the second-chance buying opportunity you were waiting for.”
Seitz touched upon Roku’s relevant operational metrics during its recent Q3 report in his article, saying, “Roku ended the third quarter with 56.4 million active user accounts, up 1.3 million from the prior quarter. However, analysts had expected 1.68 million new user accounts.”
While growth was disappointing, Seitz did note that, “Average revenue per user climbed to $40.10 in the third quarter, up 49% from the same quarter last year.” With regard to international expansion, Seitz said, “The company now operates in more than 20 countries including the U.K., Mexico and Brazil. On Sept. 5, Roku announced plans to do business in Germany later this year.”
This has the opportunity to be a nice growth opportunity for Roku; however, it’s also important to note that digital advertising companies like Roku tend to generate their best margins in the North American markets and therefore, growth from emerging markets might not create the bottom-line growth that some investors expect to see.
Chris Lau, a Nobias 4-star rated analyst, recently published an article at Baystreet which highlights his concerns for the company's growth and the potential risks of piling into the major COVID-19 winners once again. Lau wrote, “Tech. investors should avoid jumping back to Teledoc (TDOC), DocuSign (DOCU), Roku (ROKU), and especially Peloton (PTON). The document firms may have bottomed from here as electronic document sharing volumes increase. Nevertheless, PTON and ROKU are potentially at risk of losing their fad.”
It appears unlikely that we’ll see major COVID-19 social distancing measures or lockdowns in the U.S. like we did in 2020 (politicians on both sides of the aisle in the U.S. have been outspoken against large scale lockdowns because of the negative economic impact). And, as Lau points out, “Streaming stocks are also losing momentum.” He continues, “Roku is trying to grow its revenue by winning advertisers and selling a monthly ad-free subscription. The former will have trouble competing with the likes of YouTube Premium. Roku will increase ad minutes per content, hurting viewership and advertiser return on investments.”
In another recent article, Lau highlighted the continued negative momentum that Roku faces, which, in his opinion, are largely inspired by concerns surrounding rising competition and Roku’s inability to grow its advertiser base. In that piece, Lau wrote, “Investors are worried that Roku’s ad-supported content will not lift revenue. Their concerns are justified. Roku needs to sustain user growth and increase the ads per content displayed. Yet the more ads it pushes to viewers, the less appealing its service is. Conversely, Youtube gradually increased its ad content. This encouraged more users to sign up for the premium subscription.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Lau isn’t the only analyst that is bearish on Roku shares (even after their recent sell-off). Anusuya Lahiri, a Nobias 4-star rated author, recently published a piece at Yahoo Finance which highlighted a downgrade from Wall Street analyst, Michael Nathanson, of research firm Moffett Nathanson. Lahiri noted that Nathanson recently “downgraded to Sell from Neutral with a price target of $220, down from $330, implying a 20.4% downside.” "Simply put,” Nathanson said, “we think our and the Street's long-term revenue and earnings estimates are just too damn high."
Lahiri did note that Matthew Truist, who is a Nobias 4-star rated analyst, maintained his “Buy” rating on ROKU shares after the company’s most recent quarter. Truist did lower his price target from $360 to $330; however, at the time, that $330 price target still represented 30% upside potential.
Looking at the other credible Wall Street analysts that our algorithm tracks (individuals with 4 or 5-star ratings) the average price target for ROKU shares is actually higher than Truist’s recent adjustment. The average price target amongst the Nobias credible analysts is $380.63, which implies upside potential of approximately 66% from Roku’s current share price of $229.25. Overall, 90% of the credible authors that we track have expressed a “Bullish” opinion on Roku shares. With that in mind, the stock’s recent 53% sell-off appears to present an attractive opportunity for investors.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long GOOGL and AMZN. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.