Reassessing the Bull Case for Roku (NASDAQ: ROKU)

Market Context and Current Performance

In 2024, the stock market has seen extreme volatility, with sharp divergences in performance among stocks. Despite strong fundamental performance, Roku (ROKU) has seen a significant decline in its share price, down nearly 40% year-to-date. This disconnect between stock price and underlying business performance presents a compelling opportunity for investors to reconsider Roku’s potential.

Positive Q1 Results and Product Developments

Roku’s Q1 earnings report from April showed promising developments:

• Revenue Growth: Roku reported a 19% year-over-year increase in revenue, reaching $881.5 million, surpassing Wall Street’s expectations of $850.4 million.
• Platform and Device Sales: Both segments grew by 19% year-over-year.
• Profitability: Adjusted EBITDA turned positive, with a margin of 4.6%, up from a -9.3% margin in Q1 of the previous year.

Roku’s new high-end smart TV, the Roku Pro TV, has been well-received. Despite hardware typically being a low-margin segment, it acts as a gateway to more profitable platform revenue. Notably, Roku’s streaming services distribution, such as driving viewers to Paramount+ during the Super Bowl and handling payment processing through Roku Pay, has shown strong traction.

Strategic Growth Drivers

1. Shift to Platform-First Model: Roku’s focus on platform revenue over hardware has improved margins and revenue stability. Hardware now accounts for less than 20% of total revenue, reducing reliance on seasonal device sales.
2. Secular Tailwinds: The transition from traditional TV to streaming continues. In Q1, streaming hours grew 23% year-over-year in the U.S., while traditional TV viewing declined 13%.
3. Original Content and Viewer Engagement: The Roku Channel is gaining popularity, bolstered by original content and sports hubs like the NFL and NBA zones, driving engagement and subscription sign-ups.
4. Roku Pay: The company’s payment processing service simplifies sign-ups for streaming services, creating a captive growth market.
5. International Expansion: Roku’s expansion into markets like the UK, Canada, and Mexico offers substantial growth potential, despite initially lower ad revenue per user compared to the U.S.
6. Strong Cash Position: With over $2 billion in net cash and no debt, Roku’s financial health provides a cushion and the capacity for strategic investments.

Valuation and Future Prospects

Roku’s current share price around $57 translates to a market cap of $8.26 billion. Adjusting for net cash, the enterprise value is approximately $6.20 billion. Given Roku’s trailing twelve-month free cash flow (FCF) of $427 million, the stock trades at a modest 14.5x TTM FCF multiple. This valuation appears attractive, particularly considering Roku’s potential for sustained double-digit growth and improving profitability from a higher mix of platform revenue.

Conclusion

Roku’s robust Q1 performance, coupled with strategic initiatives and strong market positioning, supports a bullish outlook. The current dip in share price presents an attractive entry point for investors. With multiple growth levers, improving margins, and a strong cash position, Roku remains a strong buy. Investors should consider taking advantage of the current valuation to build or expand their positions in Roku.