Last year was an especially bad one for formerly fast-growing tech stocks. Roku (ROKU -1.52%), in particular, was absolutely hammered -- its shares crashed by 82% in 2022. But this year is off to a much better start, and investors are starting to wonder whether or not tech shares can maintain their momentum.
As we look toward the rest of 2023, is it likely that this top streaming stock reaches $100 per share by year's end? Let's take a closer look at what shareholders should expect.
Running the numbers
As of this writing on Jan. 23, Roku shares are trading hands at around $55, with a price-to-sales multiple of 2.4. That ratio was pushed higher thanks to a stock price that has soared by 34% so far in January. Even so, the current valuation is about as cheap as Roku has ever been since it went public in September 2017.
For the stock to reach $100 by the end of the year would require a phenomenal return of 82%. In comparison, the Nasdaq Composite index's average annual return was 13.7% over the past 10 years.
Given that it's a perennially unprofitable enterprise, I think Roku would need to boost its revenue significantly this year for the stock to pop by anything like that amount. Between 2018 and 2021, sales increased at rates of greater than 50% annually, an impressive accomplishment made possible by the fact that the business was quickly gaining share in the streaming player market. But growth has slowed down in recent quarters. Consequently, the consensus analyst estimate forecasts that Roku's revenue will rise by just 5.3% in 2023.
This means in order for the stock to close 2023 at $100, either Roku's revenue, its valuation multiple, or both, would have to skyrocket this year, and meaningfully surprise to the upside. This is a really optimistic scenario, in my opinion.
The stock has had monster years in the past, most notably 2019 (up 337%) and 2020 (up 148%). But to try and bet on a substantial price-to-sale ratio expansion in less than 12 months' time is not a proper way to invest.
I wouldn't bet on it
To assume that a stock can climb more than 80% in a short time is a huge leap of faith. Even though Roku has, at least before the slowdown in 2022, been a burgeoning streaming ecosystem and digital ad platform riding the secular trend of streaming entertainment, it must nonetheless face the realities of macroeconomic headwinds.
Last year, the digital ad market was negatively impacted by the Federal Reserve's aggressive rate-hiking policy, as corporations cut back their advertising budgets in preparation for what they expected would be a worsening economic situation. Even the most dominant players in the industry, like Alphabet and Meta Platforms, reported ad sales slowdowns. And this softness included the connected TV market.
According to management, Roku's revenue is expected to decline by 7.5% in the just-ended fourth quarter on a year-over-year basis. And Wall Street only projects the company's revenue will rise in the mid-single-digit percentages next year. I don't think this paltry expectation is enough to push the stock to $100. To be fair, however, Roku increased its number of active accounts by 16.5% in 2022 compared to 2021, with users streaming 23.9 billion hours of content in the last three months of the year. That's a positive sign when it comes to user engagement.
But the company has faced gross margin pressure, particularly with its hardware segment. And Roku hasn't been consistently profitable. It's hard to imagine a situation where these headwinds become tailwinds in the near future because of the heightened uncertainty right now with the macro picture.
Investors hoping that Roku will hit the $100 mark sometime in 2023 shouldn't hold their breath. The beaten-down stock is showing signs of life to start the year, but it's unclear if that will continue.
