While Roku has faced a challenging year so far, with its stock falling by about 30% year-to-date, the company posted better-than-expected Q1 2024 results in late April. Revenue rose 19% to $881 million, with growth driven by an increase in active users on the platform. However, concerns remain as per-user revenue growth for Roku’s platform business appears to be easing. Additionally, the company may be facing headwinds related to its streaming service distribution business.
Looking at a slightly longer period, Roku’s stock has seen a sharp decline of 80% from early 2021 levels, although the decrease has not been consistent. Returns for the stock were negative in 2021 and 2022, but saw a significant increase in 2023. In comparison, the S&P 500 has seen more stable returns over the same period. The Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year over the same period, indicating better returns with less risk.
The current macroeconomic environment, with high oil prices and elevated interest rates, presents uncertainties for Roku’s future performance. The secular trend of ad dollars shifting towards digital video formats could benefit Roku, as engagement rates on its platform have been on the rise. Total streaming hours and hours streamed on the Roku channel have also seen significant increases, potentially driving higher-margin advertising revenue in the long run. Roku has made progress in managing costs and generating more cash, with free cash flow improving significantly in Q1.
Despite these positive developments, investors remain wary of higher competition and the company’s expectations of slowing platform sales. The stock currently trades at just about 2.2x forward revenue, considerably below peak levels in 2021. Trefis values Roku stock at about $70, which is 15% ahead of the current market price of $62. It remains to be seen whether Roku will be able to overcome these challenges and see a recovery in the coming months.
