ROKU stock is too expensive after 2 quarters of slower growth


If you are a contrarian investor, you may believe that Roku, Inc. (NASDAQ: ROKU) underperformed the broader market in 2021 and is now an investment opportunity. In 2021, ROKU’s stock is down nearly 6% against gains of around 18% for the S&P 500.

Source: Michael Vi /

Being a contrarian investor has a lot of merits. If you are on the safe side and the market agrees with you, then a stellar profit could occur. The “buy low and sell high” philosophy is undoubtedly a classic.

But if you’re wrong about the timing and the fundamentals, and the majority of investors don’t share your bullish and bold view, you could face huge losses.

Stock market trends change easily and quickly. The ROKU action faces several significant challenges, and I don’t think it is a game against the tide. Allow me to develop my arguments.

ROKU share in the news

How does Roku generate revenue? The business model is based on digital advertising, the sale of its streaming players and the distribution of content.

Roku has expanded its operations outside of the United States this year. In June, he announced that TCL Electronics would launch TVs with Roku capabilities in the UK

Roku Global Vice President Arthur van Rest said, “TCL was one of the first TV brands to adopt the Roku operating system and together we have created many award-winning TVs that deliver excellent quality. image and ease of use. “

Now Roku is expanding into another large European market. According to Reuters, the company plans to “launch its streaming players in Germany later this year, its second major European rollout, seeking to capitalize on a pandemic-triggered shift to watch more video on demand.”

While the evolution of the European market is positive, there is also negative news for Roku – and it has to do with competition in the US market.

Amazon (NASDAQ:AMZN) will sell a line of smart TVs to gain a greater share of this growing market. This puts him in direct competition with Roku and Alphabet Inc. (NASDAQ:GOOGL, NASDAQ: GOOG) Google.

The home entertainment market is already tough, which makes that bad news for Roku. A “price war” could hurt its profit margins and require additional capital investment.

Roku’s latest results are cause for concern

In its second quarter earnings report and letter to shareholders, the company said it was satisfied with its financial performance. “Roku had a strong second quarter, with record revenue growth driven by exceptional performance in platform monetization,” the letter read.

Net revenue grew 81% year-over-year (YOY) to $ 645 million and platform revenue increased 117% from last year to $ 532 million . Gross profit was $ 338 million, an increase of 130% year-on-year. Finally, Average Revenue Per User (ARPU) increased 46% year-on-year to $ 36.46 on a 12-month rolling basis (TTM).

Yet several other key metrics revealed an alarming trend. First, active accounts only increased 2.8% to 55.1 million. In contrast, active users grew 4.7% in the first quarter of 2021 and 11.3% in the fourth quarter of 2020. Roku had two consecutive quarters of declining growth in active users.

Streaming hours also declined in the second quarter of 2021, reaching just 17.4 billion hours from 18.3 billion hours in the first quarter of 2021. And although the total net revenue in the second quarter of 2021 increased , the total gross margin fell to 52.4% from 56.9% in the first quarter of 2021.

At the same time, total operating expenses increased and operating income fell to $ 69.1 million from $ 75.8 million in the first quarter of 2021.

None of these elements is a positive factor for profitability.

On top of that, Roku forecasts total gross profit for the third quarter of 2021 of $ 315-325 million, which is lower than the total gross profit of $ 338.3 million reported in the second quarter of 2021.

The expected total net revenue of $ 675 million to $ 685 million also shows slower growth. The upper range, if reached, would indicate quarterly growth of 6.2% in the third quarter of 2021, up from 12.3% in the second quarter of 2021. The quarterly revenue growth in the first quarter of 2021 was also a loss of 11. 6%.

Covid might not be Roku’s benefit now

Both the increase in income and active users and the subsequent downturn were likely caused by the pandemic. While Covid-19 has certainly had a positive impact on the growth of Roku, this may change as the virus is lessened.

Roku released an annual survey that detailed his beliefs about the future of streaming:

“The survey found that over the past year, the switch to TV streaming has been accelerated by the pandemic with more content – including live programming and new movie releases – switching to TV streaming. The ease of use, cost savings, and quality of TV streaming content have been shown to have extremely wide intergenerational appeal among US consumers. “

Roku CEO Anthony Wood said, “These results show that TV streaming has passed a tipping point.” But only time will tell if it’s true.

The decline in active users, streaming hours and revenue growth is of concern and should be watched over the next few quarters. If Roku is correct about his annual survey, we should anticipate a sustained increase in these key metrics.

ROKU stock is too expensive

Roku has a Return on Investment (ROIC) trend which shows that it hasn’t created value for quite some time. In 2015, Roku had a negative ROIC. In 2020, that number was -2.72%. According to Investopedia, “It is believed that a business creates value if its ROIC exceeds 2% and destroys value if it is less than 2%.

By comparing some key financial ratios of ROKU stock to those of the S&P 500, you can see how overvalued Roku is.. For example, The morning star reports that Roku’s price-to-book ratio is 16.8x versus 4.5x for the S&P 500.

Additionally, Roku’s price-to-sales ratio is 18.6x versus a figure of 3.2x for the S&P 500. And the estimated futures price-to-earnings ratio for Roku is 196.1x versus a number of 22. , 2x for the S&P. 500.

I’m not impressed with Roku’s revenue growth over the past few years. This strong trend is not making any money for the company, and that is worrying. Additionally, I see an upward trend in outstanding shares which I believe will continue and lead to dilution of shares.

Roku has a business model that I’m having trouble with so I can’t be thrilled with ROKU’s stock.

As of the publication date, Stavros Georgiadis, CFA does not have (directly or indirectly) any position in the securities mentioned in this article. The views expressed in this article are those of the author, subject to Publication guidelines.

Stavros Georgiadis is a CFA Chartered Equity Research Analyst and Economist. He focuses on US stocks and has his own stock blog at He has written various articles for other publications in the past and can be contacted on Twitter and on LinkedIn.


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