Summary
Roku’s odds improve, but there are still question marks outstanding.
User growth is the key here, and its numbers don’t reflect a ”high growth story”.
The lessons that investors should takeaway from this investment, and applying it to one’s investment process overall.
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B4LLS/iStock via Getty Images Investment Thesis
Roku ( ROKU ) has seen its stock battered. Here I highlight the positive and negative considerations for investors to think about.
The positive element is that Roku holds more than 55 million active accounts. That affords Roku a lot of levers to continue its growth strategy.
On the other side of the equation, the active account growth is slowing down to just 2.4% of sequential growth. And this poses a problem for Roku.
Furthermore, I note that at 8x forward sales for the Platform business, this makes the stock become very interesting. Investor Sentiment Remains Sour
Data by YCharts When Roku released its Q3 2021, the next morning I wrote: Having to pay 11x forward sales doesn’t leave new shareholders to the stock with a large margin of safety. Best to avoid this name for now […] I believe that the market has underreacted to Roku’s near-term prospects. I subsequently followed up that insight a few weeks later by writing: Interestingly, even though the market’s reaction post-earnings was muted, I took a rare bearish stance on Roku. Given that I’ve been a Roku shareholder in the past and that I was lucky enough to get out with meaningful gains, I have very positive associations with the company’s prospects. To paraphrase Daniel Kahneman, I’ve been primed to like the stock. With that in mind, here’s what I want to discuss today: If you don’t know who you are, this is an expensive place to find out (George Goodman). Revenue Growth Rates Fizzling Out
( Source ): author’s work
Seeing Roku guide its revenue growth rates for 38% y/y is not a problem. You may contend that Roku is lowballing estimates so that it can ultimately reach 40% y/y in revenue growth rates, or perhaps even the low 40s% CAGR.
The problem has less to do with the upcoming quarterly guidance, and everything to do with the overall market dynamic.
We know that other Covid winners have seen their demand decline meaningfully faster than even their management expected. You can look to Peloton ( PTON ) or DocuSign ( DOCU ), for being two such names, or you can look further afield to Teladoc ( TDOC ).
That being noted, when the market enters panic mode, there’s absolutely no point in trying to define an accurate reason.
Your job now is to go through and try to make some rational assumptions where the market is clearly wrong and pick out the one or two investments that you feel you are highly likely to be right on.
Because I’m a strong believer that the market is mostly right, most of the time. Simply prone to exaggeration from time to time. Not All Revenues Are Equal
Source: author’s calculations As you know, the Player business has had some supply chain issues, which means that during the near term, that side of its operations will be operated at a loss.However, looking back to before the pandemic , Roku managed to operate the Platform segment with 5% gross margins. So, the Player side of the business was a positive contributor to the overall business.Moreover, if we look out to next year, and assume that Roku’s revenues grow by 35% relative to this year, this would mean that Roku’s revenues would reach approximately $3.8 billion.If we follow through with the breakdown in revenues as above, this means that approximately $3.2 billion of its revenues are associated with the high margin Platform segment.This means that when investors are asked to pay $27 billion for Roku, they are only paying an 8x multiple for its high-margin Platform segment. And that doesn’t seem expensive at all.On the other hand, the problem with Roku’s investment thesis is that Roku isn’t seeing a meaningful increase in active accounts. Growth in Active Accounts ( Source )As I remarked in my previous article , the sequential growth in active accounts points to approximately 2.4%.And if you’ve read my work before you’ll have seen me say, always pay attention to user or customer growth, as it often more indicative of the underlying prospects than a […]
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