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Roku Buying Opportunity Or Signal To Sell?

Daniel Laboe

Roku ROKU has been on an absolute tear this year with its year-to-date returns hitting north of 400% back in September. The firm’s sales growth has been accelerating with year-over-year growth of more than 50% for the past 3 quarters. ROKU just reported its 8th straight top and bottom-line earnings beat in its after-hours earnings release Wednesday, November 6th, but the markets ripped the shares down over 16% the following day.

Traders and investors were looking for any reason to sell-off this stock following its enormous run-up this year. All it took was a feather to tip overzealous investor scales towards reality. This company has an extremely compelling product offering and proven business model but is it enough to justify double-digit forward P/S valuation.

The markets didn’t think so. Following Wednesday’s earnings, the stock was pushed to a single-digit P/S multiple. This was due to a marginally lower than expected Q4 revenue guidance spelling anxiety for investors and traders at ROKU’s rich valuation.

The Business

Roku is on the right side of the streaming war as more competition in the space only adds to its product offering. Roku has become almost tantamount with cord-cutting. According to Roku's most recent shareholders' letter, "roughly 50% of U.S. cord cutters are Roku customers, and around 56 million households in total will have canceled cable or satellite TV subscriptions by 2023." Its devices range from a $30 4K plug-ins to very affordable TV options, partnering with top brands.

Roku is well-positioned for the streaming war, which is coming to a boil. As the streaming war rages between Netflix NFLX, Amazon AMZN, Disney DIS, and an ever-growing number of competitors, content on Roku's platform broadens, and so does its ability to profit. As more people spend more time streaming their favorite shows on more services, Roku makes more money.

Performance

ROKU went from a mid-cap bordering on small-cap stock to a large-cap in just 10 months. The firm has proven itself in the markets as it takes an increasing amount of market share from its biggest competitors, including Apple TV AAPL and Amazon Fire TV. As you can see below, ROKU has far outperformed any comparable I could use.

Will Roku be able to continue its terrific tear through the financial markets? This is a difficult question to answer, considering its already high valuation.

ROKU has big shoes to fill, but if its calculations are correct and 50% of the 56 million cord-cutters over the next 3 years turn to Roku, then on average, the firm would be adding more than 20% additional customers annually. This is a considerable number considering that the firm will also be growing its average revenue per user, which it has done quarter-over-quarter since the company went public in 2017.

Over the next couple of years, analysts are estimating the company will grow its topline by 36% and 30%, respectively. If Roku maintains a 50% market share in streaming devices, then these revenue figures may be understated.

Take Away

The key to Roku's future success is its ability to remain the market leader in streaming devices. Roku's drop in price and valuation is a good thing for potential investors, but I may wait for a further slide in valuations to put any sizable position on. The company is barely under a double-digit forward P/S multiple trading on the higher end of its 5-year range (3x – 15x).

I believe a buying opportunity is approaching, but patience is the key to any robust investment strategy. ROKU may have more room to fall.

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