Is Roku Shares Oversold?

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Roku stock fell 11% in the past three trading days following the weaker-than-expected earnings report for the second quarter of 2022, bringing the decline to about 67% so far. While Roku suffers from supply chain issues in its streaming hardware business and lower subscriber growth following the easing of Covid-19 restrictions for some time, new challenges are emerging for the company’s platform business. The US economy looks weak, with GDP contracting for the past two consecutive quarters and persistently high inflation hurting household budgets and consumer confidence. This, in turn, is helping marketers cut spending on digital advertising, one of Roku’s most profitable revenue streams. In the second quarter of 2022, as Roku’s revenue grew 18% year-over-year to $764 million, down 81% from the same quarter last year, the company posted an operating loss of approximately $110 million, compared to an operating profit. from $69 million a year ago. With subscriber growth slowing, Roku had to resort to increased customer acquisition spending, with sales and marketing expenses nearly doubling year over year to $185 million. Looking ahead to the third quarter of 2022, Roku expects revenue to reach $700 million, up approximately 3% from last year and sequentially, while forecasting a net loss of approximately $190 million.

We lowered our price estimate for Roku to $98 a share from about $140 a share earlier to account for slowing growth and the relatively difficult near-term outlook. However, our price estimate remains about 30% above the market price. There are, in our opinion, a number of reasons to stay on Roku at its current level for a long time. The transition from linear TV to connected TV is a secular trend and Roku remains well positioned in this space, with a growing number of more than 63 million active accounts. Roku has made solid progress in monetizing through advertising and growing content investment, with AR
AR
PU is up 21% from last year to about $44 in the second quarter. While growth is likely to slow in the short term, there is much more room for expansion in the long term. Advertisers are expected to spend about 22% of their US TV advertising budget on streaming by 2022, despite streaming accounting for about half of the TV time of US consumers aged 18 to 49 in the second quarter. As the mix of streaming ad spend grows, companies like Roku should capitalize on it. In addition, Roku’s valuation also looks attractive, with stock trading less than 3.5x future revenue, well below the 12x levels the company traded before the pandemic.

See our analysis on Roku Rating: Expensive or Cheap to learn more about what drives our Roku price estimate. Our analysis on Roku Earnings has more details about the company’s business model and key revenue streams.

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