As many longtime Roku (ROKU 1.38%) shareholders painfully know, the leading global streaming and connected TV company has seen its stock decline by more than 70% since July of last year. Though the company has posted stellar growth numbers over the last few years, the recent sell-off in high-growth stocks generally appears to have taken Roku with it.
But with the company's stock now sitting well below even its pre-pandemic highs, it raises the question of whether or not now is an opportune time to pick up some shares. Let's take a look.
Image source: Getty Images.
Roku by the numbers
Last month, Roku reported its fourth-quarter earnings to wrap up its 2021 fiscal year, and needless to say, the market wasn't pleased (the stock dropped by more than 30%).
Roku finished the year with roughly $2.8 billion in revenue and $1.4 billion in gross profit, which were up 55% and 74%, respectively, from the year prior. Additionally, Roku added 8.9 million active accounts during the year to reach a total of 60.1 million and maintain its leadership position as the number one streaming platform in the U.S., Mexico, and Canada. However, while the headline numbers certainly looked good, the quarter came with some bad news as well.
Increased supply costs in Q4 led to a -28% gross margin in Roku's player business -- the hardware used to run Roku's operating system -- which even created a year-over-year decline in the company's total gross margin figure. Roku's management team attributed this decline to simply prioritizing account acquisition. In other words, Roku chose to swallow the cost increases and maintain its low price point because it believes the lifetime value it can generate from an active account on its platform exceeds the up-front losses on its hardware. And so far, the results seem to support that claim.
| Year | Player Gross Margin | Platform revenue as a % of overall revenue | Total Gross Margin | Total Gross Profit |
|---|---|---|---|---|
| 2018 | 11% | 56% | 45% | $332 million |
| 2021 | (11%) | 83% | 51% | $1.4 billion |
The streaming opportunity
This quarter, Roku's total number of active accounts in the U.S. officially surpassed the number of subscribers to all U.S. cable companies combined. Yet, in 2021, only 18% of U.S. TV advertising budgets were spent on streaming, with the remainder focused on traditional linear channels.
This massive disconnect between eyeballs and ad dollars presents a big opportunity for Roku since it not only owns its own advertising inventory on its home screen and in the Roku channel, but the company also gets access to a chunk of the ad slots on other streaming channels as well. Roku's CEO Anthony Wood expressed his optimism for this space on the latest conference call when he stated that eventually, "all TV advertising is going to move to streaming."
But Roku's platform doesn't just benefit from ads. It also gets a portion of subscription revenue as well. And right now, just about every major media company in the world seems to be plowing money into streaming initiatives. Take Paramount Global (PARA 13.05%), for example. On its latest conference call, Paramount Global's CFO, Naveen Chopra, stated that the company expects to spend $6 billion on direct-to-consumer (streaming) content in 2024. And their user base is just a fraction of the size of media giants like Netflix (NFLX 2.44%) and Disney (DIS 1.94%).
With this much money being poured in for both subscription and ad-based businesses, Roku clearly stands to benefit as the current leader in the streaming platform space.
Is it a buy?
Thanks to the precipitous decline in its stock price over the last few months, Roku's valuation has gotten far more attractive. However, since the company is reinvesting nearly all of its excess cash into the continued buildout of its advertising platform as well as original content, it can be misleading to value the company based on its trailing free cash flow.
Instead, I prefer to look at its enterprise value (market cap minus net cash) to gross profit ratio, which currently stands at roughly 11 times. As Roku's platform revenue continues to climb and becomes a greater portion of the overall business, the company's free cash flow margin should accelerate rather quickly.
All in all, Roku continues to be the dominant operating system in a rapidly growing industry that's still under-monetized. For investors with a long time horizon, Roku's a great company to consider adding to your portfolio.
