When Cathie Wood forecast that Tesla would rise to within spitting distance of becoming a trillion dollar company, its market cap was just 6% of that target. In 2018, the prediction seemed outlandish yet just 3 years later Tesla had reached a market capitalization of $1.2 trillion.
Now Cathie is out with another similarly wild prediction: Roku will rise by more than 9x and hit $605 by 2026. Is it a crazy statement or could Cathie Wood be right?
Roku Is A Pioneer And Gaining Strength
When Roku launched, the Great Recession was in full swing. Like Uber, another Great Recession start-up success story, Roku went after market share and won.
The company holds the mantle as the top streaming company in North America; not just USA and Canada but Mexico too.
The key to the company’s success has been its operating system that trumps competitors on quality. Where its rivals have lengthier buffering rates and mobile OS, Roku enjoys best-in-class ratings for video start failures.
The user experience is further enhanced with thousands of TV shows and movies on the Roku Channel, where the company has a big opportunity to monetize its ad inventory.
The Proof Is In The Pudding
When it comes to value to customers and user experience, the proof is in the pudding: growth rates. On that metric, Roku is crushing it. Revenue growth has been on a tear:
- 2017: 28.6%
- 2018: 44.8%
- 2019: 52.0%
- 2020: 57.5%
- 2021: 55.5%
So if the yearly top line growth has been stellar, what has caused investors concern?
The recent quarterly comps are where the flies landed in the ointment. In 2021, Q1 growth was 79.0% year-over-year. By 2022, Q1 growth had slowed to 27.8% on an annual basis.
Are consumers cutting back and saving money by giving Roku the chop? The jury is out but what is not in doubt is that inflation is a headwind affecting consumers significantly now.
A saving grace for investors is that the company turned the corner from operating income in the red to the black in 2021. In 2021, the $239.6 million in operating income eclipsed the sum of all the operating income losses posted in the prior four years.
Bears will argue that 2021 trend has failed to persist into 2022, when the company returned to a losing quarter by reporting a $23.1 million operating income loss.
What Lies Ahead
The dip into the red on operating income and slowing top line growth in early 2022 may just be a blip and that’s what Cathie Wood is betting on. The fundamentals of the business are solid and the growth trajectory looks impressive.
The company takes a 20% cut of every Roku Pay transaction; Roku Pay is used to buy content on the platform. Perhaps more significantly, it earns 30% of ad inventory from ad-supported services that are subsequently sold to advertisers.
This model is contributing to consensus analyst revenue forecasts of:
- 2023: $4.5 billion
- 2024: $5.5 billion
- 2025: $6.1 billion
- 2026: $7.6 billion
As the most popular streaming platform, Roku is set to benefit from industry tailwinds too. Video services monetized by ads are expected to be nearly a $260 billion industry by 2025 according to research, and no company is better positioned than Roku to benefit from that.
So is now the time to buy?
If you look at P/E ratio, you’ll probably skip the stock and move on. It’s an eye-popping 107x.
But earnings are a poor measure to use for a fast-growing company like Roku, just as they were for Amazon during its ascent. Price/Sales is a better metric to use and on that front Roku is highly attractive, sitting at just 4x – close to the cheapest level it’s been since the turn of the decade.
We can’t come close to Cathie Wood’s price target when we ran cash flow projections. We see intrinsic value up close to 20% at $77 while analysts on average are more bullish with a $101.28 consensus target. Cathie Wood’s price target for Roku is 6x the consensus. Whether she is right, the upside by any measure for Roku is significant.