What can be anticipated for Roku's share price over the next half decade?
What can be anticipated for Roku's share price over the next half decade?
Roku (with a modest decrease of 0.08% in its shares, denoted as ROKU) is an unusual company. It operates in the streaming TV platform sector, a field filled with tech giants boasting enormous budgets. Yet, Roku emerges as the market leader in the United States, and its influence is also expanding in international markets like Mexico. Despite its significant market dominance, Roku's stock has witnessed a downturn of 57% over the past five years, possibly due to investor doubt concerning its profitability.
However, the future does not hinge on the past. Roku's business continues to thrive, and its shares are trading at some of their most affordable levels in years. The question is, will this bode well for shareholders in the next five years? Let's delve into the figures to find out.
Continuing on the streaming TV revolution
From a sector perspective, Roku still enjoys considerable positive growth indicators. According to Nielsen, streaming video only makes up 41% of TV viewing in the United States, with a projection that this figure will approach 100% in the next 10 to 20 years.
Roku plays a significant role in this transition. In the past, most TV viewing in the U.S. was on third-party streaming services like Netflix. Today, Roku has developed its own free streaming service called Roku Channel and possesses a 1.6% share of U.S. TV viewing. According to management, Roku Channel is the third most popular application on the Roku platform, which makes sense, given its market share and its exclusive availability on Roku systems. Streaming hours on the Roku Channel increased by 80% in the last quarter.
Increased viewing hours, and particularly on the Roku Channel, should lead to increased revenue for Roku. This trend has already manifested, with Roku's platform revenue increasing by 15% year over year last quarter to $908.2 million. This segment boasts high gross margins of 54.2%, majorly attributed to advertising and promotional spending across Roku systems.
Progressively enhancing profitability
Over the past five years, while Roku's stock has taken a substantial hit, revenue has seen a cumulative growth of 232%. The growth issue isn't a challenge for Roku; rather, the inherent profitability of its operations is the main concern.
Operating income was -$600 million over the past year and has been negative for a few years now. However, in recent quarters, Roku has shown signs of improvement in its operating margin. In Q3, operating margin stood at -3%, which is a significant leap towards profitability from a financial viewpoint.
Investors should closely monitor Roku's operating margin for the upcoming quarters. If it can sustain its revenue growth while simultaneously expanding its operating margins, Roku will finally start generating substantial bottom-line profits.
Where will the stock be in five years?
Margin uncertainty will largely impact Roku's stock trajectory for the following five years. Revenue growth will not pose a problem for Roku, given the global trend in streaming and its leading position in North American and Mexican households.
Revenue grew by 16% year over year last quarter. I believe Roku can manage a 10% annual revenue growth for the next five years. This would result in an annual revenue of $6 billion after five years.
However, the profit margin question remains. Given its consolidated gross margin of 45%, I believe Roku will likely reach 10% bottom-line profit margins once it attains a larger scale. On a $6 billion revenue, this translates to an annual earnings of $600 million.
Currently, Roku stock is valued at a market cap of $9 billion, which corresponds to a five-year forward price-to-earnings ratio (P/E) of 15. While this is relatively inexpensive, it is not significantly lower than the market's long-term average. Unless Roku's stock trades at a premium P/E ratio in five years, its value will not significantly increase based on these projections.
In conclusion, unless you anticipate Roku's revenue growth to exceed 10% annually or expect the company to achieve much higher profit margins, there is no compelling reason to invest in this stock. Future returns do not seem promising based on these estimations.
Given the positive growth indicators in the streaming TV sector and Roku's significant role in this transition, investing in Roku's finance might yield fruitful returns. The company's own streaming service, Roku Channel, has seen an 80% increase in streaming hours, contributing to a 15% year-over-year increase in platform revenue.
Investors should also consider Roku's progress towards profitability, as operating income has improved, although it remains negative. If Roku can maintain its revenue growth while expanding its operating margins, it might finally start generating substantial profits, making it an attractive proposition for investors in finance.