ROKU, INC
The Increasingly Dominant Force in Streaming
Aug 1 6, 20 2 1
Roku, Inc.
Consumer Electronics Headquarters: San Jose, CA USA
Symbol: ROKU Current Price: $357.59 Truman Lau
Recommendation: BUY Target Price: $410
[email protected] COMPANY STATISTICS
Market Cap ($ Bn): $49.31
Company Overview
Roku is the leading Connected TV Platform in the US and is growing rapidly as Linear TV's
Enterprise Value ($ Bn): $47.69
ad budgets are being moved over to the CTV space. The company's platform and
52 Week Range: $143.36 - $375.98
monetization strategy mainly revolve around a platform-agnostic ad-supported video-on-
Beta (5Y Monthly): 1.76 demand (AVOD) business model and also owns the OneView demand-side platform (DSP)
P/E (1-yr fwd): 329.93 to help its advertising customers with their programmatic advertising needs, utilizing Roku's
P/E (TTM): 242.5 first-party customer data and a huge slate of publishers for maximum brand and performance
PEG ratio (5-yr fwd): -30.48
marketing exposure.
P/S (TTM): 22.7 Revenue by Segment: 82.5% from Platform and 17.5% from Player.
ROE (TTM): 12.86%
Market Position: Low pricing strategy in the player segment as a funnel for user acquisition.
Shareholders: Anthony Wood (Founder & CEO) owns, Fidelity, Vanguard, BlackRock and
ARK Investment.
Industry Analysis
Over-the-top (OTT) and Connected TV (CTV) devices are two very popular methods of
accessing TV/video content. A Connected TV (CTV) is a device that connects to—or is
embedded in—a television to support video content streaming. Different types of CTVs
include Xbox, PlayStation, Roku, Amazon Fire TV, Apple TV, and more. Roku is the leading
player in the CTV market with a 43% market share in the U.S. during 2020.
Over-the-top (OTT) is the delivery of TV/video content directly from the internet. Users don’t
have to subscribe to a traditional cable or satellite provider to access this content; they can
watch this content on various devices—tablet, phone, laptop/desktop, television, etc. The
video is delivered in a streaming or video-on-demand (VOD) format. Different types of OTT
services include Netflix, Hulu, and Amazon Prime. Mass media and networks are also
launching their own OTT services such as Disney+ and NBC’s Peacock.
The rise of CTV and OTT has led to the phenomenon known as “cord-cutting,” which is the
growing trend of customers canceling their traditional cable and satellite subscriptions in
favor of only using these streaming or VOD formats.
Cord-cutting from Linear TV would continue to benefit dominant platforms like Roku, which
is well ahead of Amazon's (AMZN) Fire TV in terms of ad views, as the CTV ad market is
expected to grow at a highly remarkable CAGR of 31% from 2019 to 2024, as marketers
continue to shift their ad budgets over to CTV given their highly efficient ad targeting and
optimization.
While the programmatic ad spending segment is still expected to account for the minority of
the total CTV ad spending, this segment is expected to grow even faster as eMarketer
expects the segment to grow at a CAGR of 39.4% from just $3.2B in 2019 to $8.67B by
2022.
Page 2 Roku, Inc.
Investment Thesis
I rate Roku as a Buy with a Target Price of $410. My recommendation is driven by the
following key points:
• Introduction of TRC to Offer Original Content – Roku’s platform-neutral strategy
allows consumers to benefit from a wide array of popular channels, which is recently
enhanced with the introduction of The Roku Channel (TRC). TRC is part of the
company's original content production strategy that has been getting increasingly
popular among its subscribers in driving growth.
• Market Leader with Unique Value Proposition – In the CTV platform space, Roku
clearly dominates the spending for programmatic advertising as the company's
platform-agnostic approach, as well as its superior monetization capabilities, is a draw
for advertisers to allocate their ad budgets with Roku as they could also leverage
Roku's highly valuable first-party data on the Roku platform.
• Multiple Source of Growth – The biggest difference between a company like Roku
and a subscription service like Netflix, is the subscription service’s active accounts
correlate directly to revenue, while Roku’s growth can also be justified by the
monetization on a per customer basis along with number of active accounts.
• Recent Dip Posses an Excellent Buy-in Opportunity – Roku has experienced a
major sell-off after a solid Q2 earnings. As showed in the table, Roku’s share price is
extremely volatile especially near the earnings release dates. Investors are often too
optimistic before earnings but overly pessimistic after earnings release.
• Wrong Reasons Behind the Recent Sell-Off – Roku’s most recent sell-off is mainly
based on two key metrics: (1) dip in QoQ total hours streamed, as well as (2) a YoY
slowdown for active accounts growth. As Roku’s most recent Q2’21 result shows, the
total streamed hours dropped from 18.3B in Q1'21 to 17.4B in Q2'21, despite a QoQ
increase for active accounts from 53.6M to 55.1M. Notably, the market also noted the
discernible slowdown for YoY active accounts growth to just 28.1% in Q1’21. However,
the so-called slowdown on YoY growth is mainly due to a high user base in Q2’20
where Roku had grown a 41% in active accounts during that quarter. However, looking
at the metrics that really matters, which is Average Revenue Per User (ARPU), Roku
has achieved a US$36.5 ARPU during Q2’21, the highest in the history of the
company. The major (but frankly unsurprising) negative in 2Q is mainly the material
sequential decline in streaming hours, which is simply reflecting the post COVID
reopening trend. However, when excluding the abnormal 2020 and comparing the
result to 2Q’19’s, streaming hours were up 85% which is quite clear that Roku is
gaining traction with their investment in content in the Roku channel.
Roku, Inc. Page 3
Financial Analysis
Below are the financial statements and key forecasts for Roku, Inc. (ROKU).
As management had already pre-empted investors of the possibility of the negative player
gross margin in Q2’21 due to supply challenges and heightened costs relating to the
hardware segment, it is the management decision to maintain a low pricing strategy in the
player segment, which has been one of the key success factors in driving users growth and
allows the company to scale up through its highly effective monetization in the platform
segment. Nevertheless, this impact affected the overall gross margin, as Roku’s quarterly
GM fell from 56.9% in Q1’21 to 52.4% in Q2’21, along with the operating margin falling from
13.2% to 10.7% in the same period.
Page 4 Roku, Inc.
Valuation
Target price is $410 per share for Roku, which represents 15% upside from the current
share price. DCF analysis is conducted with the following assumptions:
• Material acceleration in Roku’s international expansion will lead an increase in active
accounts in ’22 better than the street’.
• 9% DR, 8x ’27 terminal revenue / 25x EBITDA
Investment Risks
Major investment risks for Roku includes:
• Intensify Competition – CTV market appears to be arguably a two-horse global race
between Amazon (Fire Stick) and Roku, with Google at a weak 3rd place.
• Continue Investments in R&D – As evolving TV standards such as 4L, 8K, HDR and
technology upgrades require continued investments in R&D for Roku’s hardware.
• Strong Power from Supplier – Once massive content platform companies have
reached critical mass long term, could leverage their content to drive less favorable
ROKU agreements, as very similar to what happened to traditional distributors.
Management & Governance
Roku’s 1,925 employees are led by CEO and Founder Anthony Wood.
