Toward the end of last year, Roku’s (NASDAQ:ROKU) extreme valuation had several of my InvestorPlace colleagues in a tizzy. Fast forward to today, and not much’s changed on this front. Over at Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), InvestorPlace’s James Brumley’s been lamenting about the fish that got away — streaming TV, providing me with a great idea to goose Google stock for the short-term and long.
“Among consumers watching streaming TV, more and more of them are doing so through a device made by Roku or Amazon.com (NASDAQ:AMZN),” Brumley wrote, “Chromecast competitors like Amazon’s Fire and Roku are gaining market share, at Google’s expense.”
Brumley finishes his article by arguing that Alphabet isn’t remotely interested in streaming TV — and that’s bad for GOOGL stock.
Why Buy Roku?
For the record, I’m very positive about ROKU stock and said so in early March when investors were fretting about the end of ROKU’s lock-up period driving it into the $30s:
“If you want to own this stock, I’d buy it, with cash in reserve to jump on any further decline in its stock price, lockup induced or otherwise,” I wrote. “In my opinion, Roku’s story is alive and well.”
Since then, it’s up 60% through August 23. Further, if you’d listened to my suggestion to buy with cash in reserve, a month later you could have purchased it at 20% less than you paid in early March.
I’m not saying this to sound brilliant (hindsight cuts both ways) but to suggest that if Alphabet’s got any interest in streaming TV, it better act sooner than later because unless there’s a market correction, I don’t see ROKU stock getting much cheaper.
Here’s Why ROKU Stock Is Set for Growth
Advertising is the key to Roku’s growth, not the physical hardware. Here’s what I said about that in March:
“My thesis for a higher stock price is based on pure math. If Roku gets more active accounts and those users stream more content, advertising rates go up, which is the company’s primary strategy for growth.”
How’s it doing on that front?
Roku announced Q2 2018 results Aug. 8 , and they were excellent with active accounts growing by 46% year over year to 22.0 million and 5.7% sequentially from the first quarter.
On the streaming hours front, users watched 57% more content in the quarter, an astounding 5.5 billion hours, an average of 83 hours per month per account.
People have got to get lives. Just kidding.
Naturally, with both numbers significantly higher, platform revenue should grow exponentially, which it did, up 96% year over year to $90.3 million and sequentially by 20%.
It’s not surprising given the results that it raised its guidance for 2018 to $720 million in revenue (midpoint) and adjusted EBITDA of $17 million, up from an adjusted EBITDA loss of $3.3 million in 2017.
Once ROKU hits profitability on a GAAP basis, investors can expect its stock to double in no time.
Again, the economy has to cooperate, but its business model and strategy to grow continues to look good.
The Bottom Line on Roku and Google Stock
Roku’s current enterprise value is $5.9 billion excluding $151.3 million in non-cancelable contractual obligations. Add that in, and it jumps to $6.05 billion.
At the end of June, Alphabet had $102.3 billion in cash, cash equivalents and marketable securities on its balance sheet and just $3.9 billion in long-term debt for net cash of $98.4 billion.
I think Alphabet can afford it whether it pays with cash or Google stock.
So, if we assume that ROKU revenues grow by 30% a year over the next five years, we get $1.9 billion based on 2017’s annual revenue of $513 million.
If we also assume a 30% growth rate (they’re growing 40%+ at the moment) and an 11% discount rate, I get an enterprise value of $11.8 billion discounted to today. That’s about double its current enterprise value.
Alphabet, if you’re reading this, I think you ought to act now, while the price is still reasonable.
If you own Google stock, this is what I’d be hoping for in my stocking Christmas Day, because it’s a win/win.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
