Shares of online streaming giant Roku have lost steam in recent times. Roku stock is down 30% from all-time highs. Despite the recent pullback, it has returned a monstrous 1,280% since its IPO in late 2017. Valued at a market cap of $44.6 billion, Roku (NASDAQ: ROKU) remains a top long-term bet for investors, and here’s why.
Roku will benefit from the cord-cutting phenomenon
The shift towards online streaming accelerated at a rapid clip in the last eighteen months due to COVID-19 which in turn has benefitted Roku, a company that also acts as a service-agnostic content aggregator. It means Roku is poised to benefit from the demand for online streaming platforms as the company’s set-top box and in-built smart TV products are supported by all content providers.
The large-cap tech stock has lost steam in recent times after it reported Q2 results last month. Roku confirmed that the number of hours its customers spent streaming in Q2 fell by 5% to 17.4 billion compared to 18.3 billion hours in Q1 of 2021. Moreover, the number of active accounts soared to 55.1 million which was an increase of 28% year over year and was the lowest ever for Roku since its IPO four years back.
As economies have reopened in major Roku markets, consumer spending has shifted towards outdoor entertainment activities and this has hurt the company’s growth metrics in Q2. Further, tech heavyweights including Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) have also announced their intention to provide television manufacturers with their proprietary smart-TV operating systems.
But Roku’s long-term prospects remain solid. A report from Pixalate states that 49% of programmatic advertisements were on Roku devices in the current quarter. The research group also expects programmatic ad spending to rise to $8.7 billion in 2022, compared to just $3.2 billion in 2019.
Roku now aims to expand in other international markets such as the U.K and European Union as well as Latin America. It will basically replicate its successful strategy that entails creating a large user base in a new market with streaming devices after which it will monetize these users.
Analysts optimistic about the growth stock
According to Michael Morris from Guggenheim Partners, Roku stock might touch $395 in the next 12-months which is 20% above its current trading price. Morris believes the streaming giant is poised to gain rapid traction in the connected-TV segment, as businesses continue to increase spending on digital channels. The growth in connected TV is expected to explode in several international markets.
Company CEO Anthony Wood explained, “Audiences, content, and advertisers continue their shift to TV streaming around the globe, and Roku is a key enabler of this long-term secular trend."
Roku has managed to double its video ad impressions in Q2 year over year allowing the top-line to grow by 81% to $645 million. Comparatively, the gross margin rose by 130% to $339 million.
Roku stock is in fact trading at a discount of 40% to consensus price target estimates.
Roku stock valuation is a concern
Despite the decline in Roku shares, the stock is valued at a forward price to sales multiple of 15.6x and 208x forward earnings. Comparatively, its sales are forecast to rise by 60% to $2.85 billion this year and by 37% to $3.9 billion in 2022. Analysts also expect the company to narrow its bottom-line from a loss per share of $0.14 in 2020 to earnings of $1.64 next year.
While Roku stock is trading at a premium, its growth forecasts command a lofty valuation. You can bet on this growth stock if you are bullish on the future of digital entertainment.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
