Market Commentary: Roku, The Future of Streaming
Roku (NASDAQ: ROKU) has been on a growth tear in recent years, with revenue and active accounts growing rapidly. Indeed over the past 5 years, through thick and thin economically, the company has grown its top line. This growth has been driven by the increasing popularity of streaming services, as well as Roku’s strong brand and user experience.
As the leading smart TV operating system it has a number of competitive advantages that make it difficult for rivals to disrupt, including:
- Large Base: It has over 71.6 million active accounts worldwide, providing it a significant advantage in terms of reach and scale.
- # Streaming Channels: It offers a wide range of streaming channels, including Netflix, Hulu, Amazon Prime Video, Disney+, and many others that combine to create a significant advantage over its competitors, who typically offer a more limited selection of channels.
- Advertising Business: Roku is expanding its advertising business and products that help brands connect with viewers.
Rapid & Sustained Growth
Roku’s financials are strong are impressive with revenue and earnings growing at a rapid pace in recent years.
- 2018: 44.8%
- 2019: 52.0%
- 2020: 57.5%
- 2021: 55.5%
- 2022: 13.1%
Margins are also noteworthy with gross margin coming in near 45% over the past 5 years, eclipsing the equivalent figures posted by rivals.
In spite of fast growth slowing in the most recent fiscal year, Roku’s growth prospects remain bright and analysts estimate revenues will grow by north of 30% over the next 5 years with operating income turning positive by 2027.
Streaming Landscape
While Roku has built a moat with its large user base and top notch user experience, the streaming market is becoming increasingly competitive, and Roku faces competition from other streaming platforms, such as Amazon Fire TV and Apple TV.
It should be noted too that the advertising business, while appearing successful, remains in its nascent stages, and has yet to gain a meaningful foothold.
But overall the signs of an upward trend are on the horizon. Recently 6 analysts upgraded their estimates and the share price appears undervalued relative to fair value which sits at $88 according to a 10 year discounted cash flow forecast analysis.
That’s slightly above the analysts consensus which is around $71 per share but far lower than the $1,493 price target ARK Invest has on the company by 2026.
Could Roku really soar to those levels?
We find it a stretch to see such a spike on the cards but the winds of positive change continue to push Roku forward both in the US and abroad so higher prices can be expected absent a sharp downturn in the markets that sinks all boats.
