Amidst volatility, Roku (NASDAQ:ROKU) has been trading sideways over the last five months. After rallying strongly in the first half of 2019, Roku stock seems to be in consolidation mode. With the company expected to announce fourth-quarter results on Feb. 13, it’s likely that Roku ‘s shares will soon start trending higher. The shares are attractive for short-to-medium-term investors.
Roku’s key performance metrics improved quarter-over-quarter from Q4 of 2018 to Q3 of 2019. Among these metrics are active accounts, streaming hours and average revenue per user (ARPU). In light of the company’s revenue and adjusted EBITDA guidance for Q4 of 2019, I believe that these positive trends continued in Q4. As a result, I expect Roku stock to have ongoing positive momentum in the coming weeks.
International Expansion Will Boost Roku’s Growth
In the next 12-24 months, international expansion is likely to be one of the biggest positive growth catalysts for Roku. In November 2019, Roku entered the European market by launching Roku TV in the U.K. The company has also launched Atvio Roku TV in Mexico.
More recently, Roku announced that it was entering Brazil, the largest streaming market in Latin America. Given the promising outlook of the country’s pay TV market, Brazil is likely to push Roku’s top-line growth higher.
In terms of numbers, Macquarie analysts believe that Roku’s international expansion will help increase its user base by 137% to 72 million by 2022 from 32.30 million in Q3 of 2019.
For Q3 of 2019, Roku reported average revenue per user (ARPU) of $22.58. Even if its ARPU remains constant, the jump in its user base should cause its revenue to climb about 130% to 150% in the next three years.
Further, if its positive ARPU trends continue, its EBITDA should also grow rapidly, translating into positive cash flow and helping to justify the high valuation of Roku stock.
Advertising Revenue Will Continue to Grow
I believe that Roku’s top-line growth will also likely be boosted by higher advertising revenue.
Studies have shown that ads on internet TV have a retention rate that’s 3.8 times higher than that of conventional TV. It is therefore not surprising that spending on internet TV ads is expected to increase from $2.7 billion in 2018 to $5 billion in 2020. Spending on internet TV ads could also be meaningfully boosted by the 2020 elections. If that turns out to be the case, Roku’s 2020 profits could beat expectations.
Moreover, Roku has successfully implemented targeted advertising, which has helped marketers who buy its ads. Overall,, internet TV accounts for 29% of TV viewing in the United States, Roku reported. However, Roku has captured just 3% of the overall TV advertising budget. In the next decade, there will be a gradual shift in advertising from conventional TV to internet TV, benefiting Roku.
The Bottom Line on Roku Stock
After its big rally, Roku stock seems to be taking a breather. However, as the company’s global expansion gains traction in 2020 and 2021, the shares will move higher.
I expect Roku’s top-line growth to remain strong over the next few years. In addition, its higher revenue should cause its EBITDA margin and cash flow growth to accelerate.
Given Roku’s ability to benefit from global expansion and advertising revenue growth, I remain bullish on Roku stock.
I believe that investors can consider buying the shares at their current levels, as I think that they look poised to rally after their consolidation is complete.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
