Roku Stock: Why I’m Buying More After A 66% Drop (NASDAQ:ROKU)

Shares of Roku (ROKU) are back in a downtrend after being one of the top (stock) performers during the pandemic period. However, Roku will continue to grow its user base and improve user monetization which could power shares higher again. Roku and Google also agreed in December to keep YouTube Apps on Roku devices which resolved a key issue for the streaming platform!

Roku is in a downtrend

Shares of Roku have lost 66% of their value since reaching their all-time high of $490.76 in July. In the fourth-quarter, Roku’s downturn accelerated as the 50-day moving average dropped below the 200-day average, a bearish technical indicator.

What is the explanation for the steep sell-off of Roku shares?

It is really hard to find a good answer for the sell-off. Roku’s third-quarter earnings card showed strong growth in active accounts and a higher ARPU figure, which streaming companies use to measure customer monetization. Commercial performance is not the reason behind Roku’s sell-off. But what may be behind the steep drop in Roku’s pricing since July is that valuation factors, attached to high growth stocks that generated stellar returns during the pandemic, are adjusting. Stay-at-home stocks like Roku have done very, very well during the pandemic and with, perhaps, slower growth on the horizon post-pandemic, investors are less willing to pay a high sales multiplier factor for Roku’s growth.

But because of the large drop in pricing and valuation factor, I believe Roku is now even better value than last year… in large part because the company is going to submit its earnings card for the fourth-quarter in February… and Q4’21 results are typically very good for streaming companies.

Looking Forward To Strong ARPU Growth In FY 2022

In the third-quarter, Roku delivered 23% growth in the number of active accounts, which also acts as a key growth metric for the streaming platform. Streaming services work chiefly through scale, so growing the customer base at a rate higher than 20% year over year was impressive. What was even more impressive for Roku was that the streaming platform generated a 49% year over year increase in average revenue per user/ARPU to $40.10. Growth in ARPU is critically important in making a streaming service profitable and Roku is doing a far better job, regarding customer monetization, than Netflix (NFLX). Netflix generated average revenue per membership — the equivalent of Roku’s ARPU — of $14.68 in the North American market (U.S. and Canada) in the third-quarter. Netflix also generated only 7% year over year growth in average revenues per membership, meaning Roku is growing its ARPU significantly faster than Netflix. While there are differences in monetization models between Roku and Netflix, I prefer to invest in businesses that have higher ARPUs because they indicate stronger potential for customer monetization.

I am revising my Q4’21 active account and ARPU estimates for Roku upward due to strong expected execution in the fourth-quarter and a slight reboot of the COVID-19 pandemic at the end of the year… which could have helped Roku’s customer acquisition. I now expect Roku to report active accounts exceeding 60M for Q4’21 and an ARPU of $44.95, a small improvement over my previous estimate of $44.80. Because the fourth-quarter is often a strong one regarding account growth and the total amount of hours streamed, the submission of Roku’s fourth-quarter earnings card could be a catalyst for the initiation of a new upleg.

(Source: Author)

Roku and Google business agreement

In December, Roku and Google reached a multi-year carrier agreement that allows Roku to distribute the YouTube and YouTube TV apps, which are owned by Google, on its platform. A previous agreement expired on December 9, 2021 which threatened Roku with losing the widely popular streaming apps. While deal terms have not been disclosed, keeping the YouTube apps on the platform significantly boosts the appeal of Roku devices for consumers.

Roku’s valuation is more than appetizing

Because of Roku’s steep drop in pricing since July, the platform represents deep value for investors that are right to expect strong revenue, account and ARPU growth for Q4’21 and for FY 2022. The expectation is for Roku to have revenues of $3.8B this year which implies 36% year over year revenue growth. That Roku is already profitable implies that ARPU gains could materially add to earnings per share growth this year. Because Roku offers a higher ARPU than Netflix, and stronger account and ARPU growth than its rival, I believe the valuation discount relative to Netflix is not deserved.

Roku is just about set to overtake Netflix regarding EPS growth, too…

Risks with Roku

Concerns over slowing platform growth for Roku, post-pandemic, are not entirely unfounded. While the pandemic provided a massive boost to Roku’s streaming business, the pandemic is waning and hopefully will not be rebooted by other variants. However, if the pandemic were to get rebooted and new lockdowns occurred, Roku’s business would likely benefit. What I see as the biggest risk for Roku is a slowdown in growth, not of its active accounts, but of its average revenue per user figure. Roku’s ARPU is critical to achieving sustainable platform profitability and Roku’s average revenue per user growth in Q3’21, in percentage terms, was more than twice the active account growth rate. A decline in user monetization (falling ARPU) and slowing revenue growth could change my mind on Roku going forward.

Final thoughts

After a 66% decline in pricing since reaching a peak in July of last year, shares of Roku are looking increasingly attractive as a growth play on the streaming sector. Roku’s fourth-quarter should see a continuation of strong account growth and, especially, accelerating customer monetization. The carrier issue between Roku and Google has also been resolved. Because of Roku’s steep drop in pricing, which is mostly undeserved, shares are now oversold and the risk profile is heavily skewed to the upside!