Roku Inc (NASDAQ:ROKU) has hit upon the right time and right place. Since going public just a couple months ago, ROKU has made a massive leap, pushing gains since inception to just shy of 80%. This recent run-up has the market valuing Roku at over $4 billion.
It’s true that overall market exuberance has likely played a hand, but the NASDAQ is up just 6% and the Dow Jones Industrial over 9%, so that can only be a small part of the of the explanation. With Netflix, Inc. (NASDAQ:NFLX) flying high, up 47% year-to-date, the entire over-the-top (OTT) streaming concept continues to increase in popularity among consumers and investors alike.
With ROKU’s emphasis on TV-based streaming, a concept that continues to gain traction for customers that have previously only had the cable bundle option, the market has demonstrated its excitement for the company and its growth prospects.
But after the big moves over the past month, the growth seems to be priced in and it’s becoming harder to see where ROKU looks for further share price increases.
A large part of the recent run-up came on the tail of third quarter earnings, where ROKU beat Wall Street estimates meaningfully (NFLX did as well and its share price reflected this). The loss of ten cents on an adjusted earnings-per-share basis versus the $1.37 loss that analysts were expecting served to kick-start the momentum that continues to work for the stock.
That momentum has been fueled by additions and partnerships that include the British Broadcasting Corporation (BBC) and Hulu and a licensing deal with Funai Electric.
ROKU’s Black Friday Strategy
Black Friday was an important day for more than just retailers. For ROKU, it was an opportunity to boost active users and get their box into more home. ROKU’s strategy was to offer a holiday discount on the Streaming Stick at a number of large retailers, in addition to lowered pricing on the 4K Ultra HD and HD Roku TV models. Even if Roku breaks even on the hardware, it’s worth it to acquire new customers, who, in the end, will deliver more value via recurring subscription revenue and advertising revenue.
Every advertiser has different metrics, but scale is up there in importance. Of course, the data that ROKU compiles on each user based on viewing habits and demographics will also provide a means of monetization down the road.
ROKU Isn’t Cheap
CEO Anthony Wood isn’t a newcomer to the TV game and he has the right vision for ROKU. The internal focus is on active user accounts and engagement measured by streaming hours, which is exactly where it should be. Growth across both metrics — 48% and 58% year-over-year, respectively — has been impressive.
But with the stock currently trading in the forties, valuation for a company that has yet to turn a profit seems lofty — or at least not particularly cheap. Investors are paying up for the growth now and, from a value investing standpoint, that’s not what one wants to do.
From a growth investing standpoint, so long as the momentum continues, the stock probably still has some upside left, but it’s not the screaming buy that it was as an IPO.
I will add that advertising is an area that could surprise to the upside. There is a lot of runway to grow the dollar amount per user. But until I see a couple more quarters of sustained growth, it’s hard for me to justify paying a premium.
As of this writing, Luce Emerson did not hold any of the aforementioned securities.