After peaking at over $160 last month with a “double top” pattern, Roku (NASDAQ:ROKU) stock traded recently at around $145. The company’s offering of up to 1 million Class A common shares on Nov. 19 took away much of the momentum of Roku stock.
The offering is a double-edged sword. The existing owners of Roku stock were diluted, but the cash infusion of $132.9 million gives ROKU the ability to make many acquisitions.
Traders only care about where the ROKU stock price will go next. So what are the chances that ROKU will keep trending higher?
Roku’s Stock Offering Explained
ROKU said in its prospectus:
“We will have broad discretion in the use of the net proceeds from this offering and, despite our efforts, we may use the net proceeds in a manner that does not increase the value of your investment.”
Roku may use the proceeds from the stock to finance regular business activities, including R&D that could improve Roku’s streaming offering and its devices. Conversely, it may acquire or invest in companies that complement its business.
Earlier this year, after ROKU raised cash, it used the proceeds to acquire dataxu. The acquisition gave Roku a demand-side platform, graphics technology, and an analytics platform. The deal also advanced Roku’s ad technology capabilities.
To grow its active user base, ROKU needs to offer popular internet TV services, and the company’s streaming platform must be subscription-driven and ad-driven. Although Disney’s (NYSE:DIS) Disney+ service and Netflix’s (NASDAQ:NFLX) streaming service do not depend on ads, ROKU is moving towards an ad-driven model.
Valuation Risks
The fact that the stock market closed at all-time highs last week, while ROKU pulled back, is a negative development. It suggests that investors are becoming increasingly unwilling to buy Roku stock at its current valuations.
Looking ahead, if the company’s gross profit growth and its revenue growth slow in 2020, Roku stock price will drop. Roku stock is up 375% in 2019, so its owners have already reaped tremendous rewards.
Bulls will argue that Disney and Apple (NASDAQ:AAPL) launched new internet TV platforms. Both companies’ platforms posted solid subscriber growth rates immediately after they were launched. And with more consumers buying flat-screen TVs powered by Roku, Roku’s audience base will keep growing in 2020.
Fair Value
To justify the current valuation of Roku stock, investors need to assume the company’s revenue will grow by at least 35% per year. In this 5-year DCF Revenue Exit model (finbox.io), a discount rate of 9.5% and a terminal revenue multiple of 7.4 times are also used. Under those assumptions, ROKU trades about 4% below its fair value. On Wall Street,13 analysts have have an average price target of $149.50 on Roku stock, according to Tipranks.
The Bottom Line on ROKU
Roku will not report its earnings until sometime in February. In the near-term, consumers who buy inexpensive LCD TVs powered by Roku will be added to its viewer total. And the higher the viewer count reported by the company in February, the higher the chances of the stock rallying.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
