Shares of over-the-top (OTT) video-streaming platform Roku (ROKU 2.11%) have hit all-time highs today, despite lacking any meaningful news. Rather, it seems the stock is maintaining its momentum in the wake of its strong earnings release earlier this month, which showed considerable progress with the company's ongoing pivot away from consumer hardware toward growing its highly profitable platform business.
There's no questioning the impressive execution of Roku's management team, but it's also worth revisiting Roku's valuation as its shares continue to push into uncharted territory.
Image source: Roku.
Roku's crushing it on fundamentals
As a quick refresher, Roku's most important operating metrics are all heading in the right direction, including active accounts and hours streamed. Both figures have marched steadily higher over the past several years with little sign of slowing down.
Data source: SEC filings. Chart by author.
In hindsight, it may have been some missed foreshadowing that Roku never disclosed unit sales in absolute terms. Initially, it was a bit odd that a company best known for selling affordable streaming media players wouldn't disclose granular detail around unit sales, instead only vaguely referring to unit growth in percentage terms; units grew 22% last quarter, for example. But as Roku continues to increasingly rely on third-party licensed sources for active account growth, as well as off-platform expansion of The Roku Channel, unit volumes for the company's first-party hardware devices are becoming less and less relevant over time.
The margin profile is also rapidly shifting thanks to the growing prominence of the platform business, which is predominantly advertising. That's helped Roku expand gross margin from around 28% at the beginning of 2015 to nearly 50% today. In no uncertain terms, Roku has done an impeccable job articulating its strategy to investors and, more importantly, executing on that vision.
Back to valuation
While the fundamentals are getting stronger every quarter, valuation is an entirely different topic. One challenge is that valuation is often predicated on comparable analysis, and Roku has no real peers to compare it against.
Some analysts like to compare Roku to Netflix, but that comparison is specious at best, as the companies have very few operational similarities beyond both offering OTT streaming. Roku relies on licensed third-party content, which it primarily monetizes through advertising; Netflix is betting big on original content, which is helping to grow its subscription business. But despite these shortfalls in comparability, Netflix is still the closest pure play to measure Roku against.
|
Valuation Metric |
Roku |
Netflix |
|---|---|---|
|
P/E (TTM) |
N/A |
145 |
|
P/S (TTM) |
10.3 |
10.6 |
|
P/B (MRQ) |
29.9 |
33.4 |
Data source: Reuters.
In terms of its sales multiple, Roku is cheaper than Netflix, but trading at over 10 times sales is still a premium valuation. Roku can partially justify its valuation with strong revenue growth, which has actually been impressively accelerating in recent quarters.
Data source: SEC filings. Chart by author.
Accelerating revenue growth and the aforementioned massive margin expansion make for a powerful combination. It's little wonder why investor sentiment around Roku has strengthened so dramatically, but the market is now pricing in lofty expectations. It's now on Roku to continue executing and delivering strong results.
