Roku: Shares Have Rallied Nearly 25% During The Last Month - Are They Still A Buy?
The cord-cutting phenomena has been playing out in the media/entertainment space for a while now. Back in 2015, traditional content distributors, such as The Walt Disney Company (DIS) or Comcast (CMCSA), began to see their share prices stagnate. Just about every company associated with the traditional, linear cable model struggled while Netflix (NFLX) shares sky-rocketed, due to that company’s massive leadership in the streaming space.
During the last 5 years, NFLX shares are up approximately 500%, making this stock one of the best large cap investments that someone could have made in the market during this period of time. However, Netflix isn’t the best performing streaming name in recent years. That title goes to Roku (ROKU). ROKU IPOed in late 2017 and its shares began trading in the $20 area. Well, today, ROKU shares are valued at $430.94, which means they’ve risen by more than 18x their original value.
Yet, in terms of investing, what’s in the past is in the past. It’s great to look at performance like ROKU’s; yet, the only thing that matters to someone thinking about buying shares today is how the company performs moving forward into the future. With that in mind, we wanted to take a look at the recent reports published by analysts rated 4 and 5-stars by the Nobias algorithm to see if the sentiment amongst these credible individuals continued to be bullish.
For those unfamiliar with Roku’s business model, it is a service that allows consumers to access all of their streaming apps in one seamless and easy to use place. Roku also invests in its own channel and content as well, though as of now, the driving force behind Roku subscriptions appears to be the consumer’s desire to consolidate their services and access them via a single dashboard.
In his recent article at The Motley Fool titled “3 Reasons Roku Will Keep Growing Faster in 2021” Nobas 4-star rated analyst, Adam Levy, highlighted the growing demand for Roku’s services by mentioning that management recently provided guidance which stated, "We expect net adds of both active accounts and streaming hours to be above pre-COVID-19 levels."
In other words, Roku’s management doesn’t see a post-COVID-19 slow down, which is a fear amongst certain investors now that society is re-opening and people will have more activities to choose from rather than being stuck inside of their homes streaming content. It’s the fear surrounding this “re-opening” trade that caused ROKU shares to fall from their current 52-week highs of $486.72 to recent lows in the $285 area in early May.
However, since then, we’ve seen shares rebound strongly as people come to terms with the strong secular nature of the streaming trend. Levy continued his piece, highlighting why demand will continue to grow for Roku’s services, mentioning the broad roll-out of individual streaming services that is expected to occur over the next year or so. He wrote, “Broadly speaking, media companies are adopting direct-to-consumer streaming and making more of their content available on connected-TV platforms. And Roku is investing in content for its Roku Channel. With more content available to stream than ever before, it should see an increase in user engagement.”
Another one of the primary components of Levy’s bullish outlook is Roku’s international growth prospects. He said, “While Roku is already the most popular connected-TV platform in the U.S., it's still in the early days of its international expansion.” He mentions that Roku is already the number 1 smart TV platform in Canada and the number 2 smart TV service in Mexico. Levy says, “Roku has an additional advantage in international markets: Viewers in those markets are more prone to engage with ad-supported content versus subscription services. Those services are a bigger focus for Roku than they are for its competitors, and The Roku Channel gives it an additional leg up.”
Lastly, Levy continues, the secular nature of the cord cutting phenomena is not going to end anytime soon, with consumers still flocking towards on-demand content services. He mentions that “Roku operates under the assumption that all TV will become streaming media. That said, Americans spent an average of 3.5 hours per day watching traditional TV in 2020, according to an estimate from eMarketer. The analysts expect TV viewing to decline by 16 minutes per day this year, and about half of that time will be shifted into consuming media on connected devices and platforms like Roku's.” He notes that without a global pandemic going on and Presidential elections occurring in the U.S., the demand for news-like services is likely to fall, relative to entertainment content. He concludes his piece, writing, “cord-cutting is on course to accelerate in 2021, and that trend is forecast to continue throughout the decade.”
With this in mind, he expects Roku to continue to produce growth in terms of subscribers and user engagement. As Roku’s subscriber base grows, so will the company’s advertising dollars. This was the major catalyst for a recent upgrade that ROKU shares received from Loop Capital analyst, Alan Gould.
Erik Volkman, a Nobias 4-star rated analyst, recently covered this upgrade for The Motley Fool. In his article, he explained that the Loop upgrade was why ROKU shares popped roughly 5.5% in a recent trading session. Volkman said, “Gould was inspired by researcher Magna Global raising its estimate for 2021 worldwide advertising revenue, with anticipated 24% year-over-year growth in digital video ads.”
Volkman highlighted many of the same aspects of the cord-cutting secular growth trend that Roku benefits from that Levy touched upon. However, Volkman also noted that during the recent Amazon Prime Day, Roku was likely one of the major benefactors, which has the potential to inspire a short-term bump to its subscriber base. He said, “And a suite of Roku products is being sold at significant discounts during Amazon's (AMZN) annual Prime Day shopping frenzy that kicked off on Monday. These often find their way into articles concerning the best Prime Day deals; this lifts Roku's visibility and should increase take-up of its products.”
Chris Neiger, a Nobias 4-star rated analyst who also writes for The Motley Fool, also covered the nearly 10% 2-day pop that the Loop capital upgrade inspires in ROKU shares last week. In his piece, he focused on the surprise upside that the Roku Channel itself was providing to bullish investors.
Neiger said, “Investors might also be bullish on Roku right now after the company said just last week that its new Roku Originals -- its original video content -- have "surpassed our expectations" and that millions of people are already streaming its content.” He continued, writing, “Roku launched 30 original series two weeks ago and plans 45 more this year. The company is tapping into the success of The Roku Channel, which reaches about 70 million U.S. households.”
Advertising revenue that Roku receives from its own channel, as opposed to sales that it receives from third party operators on its platform, are likely to be much higher which has the potential to increase the company’s margins and lead to bottom-line growth. This is paramount to the stock’s long-term success because at the moment, shares trade with a rather speculative, growth oriented valuation.
Roku shares currently trade with a forward price-to-earnings ratio of 1231x. Yes, you read that right, a 4-digit P/E ratio. This is extremely high (the S&P 500’s forward price-to-earnings ratio currently sits in the 22x area). The very high multiple here is due to the fact that ROKU has had a hard time generating positive profits throughout its history. In 2020, for instance, Roku’s earnings-per-share was -$0.14. Yet, 2021 is expected to be the first year that Roku generates positive earnings. Right now, the consensus analyst estimate for the company’s bottom-line is $0.35/share.
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.
This positive growth trend is expected to continue in the coming years as well. Right now, analysts expect to see ROKU generate 350% EPS growth in 2021, 161% in 2022, and 145% in 2023. Obviously, these triple digit growth figures draw in growth investors. Yet, for the company’s price-to-earnings multiple to trade in-line with previously mentioned blue chip peers such as Disney or Netflix (which both currently trade for roughly 50x forward expectations) Roku will have to continue on this torrid growth pace for years and years to come.
It’s very speculative to assume that such strong growth will remain in place for a decade or so; however, when we look at the blue chip (4 and 5-star rated) analysts that the Nobias algorithm tracks, it appears that the vast majority of them continue to believe in Roku’s long-term future.
Our algorithm has tracked 4 ratings from highly credibly Wall Street analysts posted during the most recent quarter. 3 out of the 4 of these price targets were bullish. They ranged from $300/share to $450/share and the average price target amongst the group was $379.25.
Roku shares are up 24.66% during the last month alone and it’s important to note that several of these Wall Street reports were published before the stock’s recent rally. The average estimate above implies negative potential from today’s $430 share price and investors should be aware of the valuation risks that come with investing in a speculative name like Roku. However, overall, we’ve tracked out of the 28 reports from other analysts and 27 of them included “Buy” ratings. Therefore, the broader community continues to be bullish on ROKU shares.
Disclosure: Nicholas Ward is long AMZN, CMCSA, and DIS. 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.
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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.