Is Roku Stock an Undervalued Growth Stock to Buy?

SUMMARY

Parkev Tatevosian, CFA, analyzes Roku's recent financial performance, highlighting its revenue growth, increasing market share, and strategic transparency. He discusses the company's improved margins, share repurchases, and updated valuation, concluding that Roku appears slightly undervalued with strong future prospects.

MAIN POINTS

• Roku reports total net revenues of $1.25 billion, up 22% year-over-year, and continues to outperform the broader index. [0:00]
• Roku's operating system is ranked number one in the US, Canada, and Mexico, with streaming hours rising to 38.7 billion, an 8% increase year-over-year. [1:03]
• The Roku Channel becomes the second most engaged app on the platform as consumers seek free, ad-supported content amid rising living costs. [2:00]
• Roku increases transparency by disaggregating its platform into advertising and subscriptions, reducing investor risk. [3:00]
• The company repurchases $100 million in shares in Q1, totaling $250 million since Q3, and shows significant margin improvement since 2016. [4:01]
• Roku's updated intrinsic value per share rises to $138, with the current market price at $127, indicating the stock is slightly undervalued. [5:02]

DETAILED ANALYSIS

Roku's latest quarterly update reveals robust growth, with total net revenues reaching $1.25 billion, representing a 22% year-over-year increase. The company has solidified its position as a leading streaming platform, with its operating system now the top-ranked in the United States, Canada, and Mexico. Roku's platform reported 38.7 billion streaming hours, an 8% increase compared to the previous year, outpacing competitors like Netflix, which has seen only modest growth in streaming hours.

The Roku Channel, a free ad-supported service, has become the second most engaged app on the platform in the US, reflecting a shift in consumer behavior as rising living costs and economic pressures prompt viewers to seek lower-cost entertainment options. Factors such as increased tariffs and higher oil prices have squeezed household budgets, making free streaming alternatives more attractive.

A notable development in Roku's reporting is the increased transparency provided to investors. By disaggregating its platform into advertising and subscription segments, Roku offers more detailed insights into its business, reducing uncertainty and risk for shareholders. This stands in contrast to some industry peers who have reduced disclosure, thereby increasing investor uncertainty.

Financially, Roku has been active in returning value to shareholders, repurchasing $100 million in shares during the first quarter and $250 million since the third quarter, utilizing more than half of its $400 million share repurchase authorization. The company has also demonstrated significant improvement in its margins, with cash flow from operations to sales rising from -8% in 2016 to 10.2%, and operating profit margins improving from -11% to 0.1% over the same period. While these margins are not yet strong in absolute terms, the positive trend signals operational progress.

Valuation metrics further support a favorable outlook. Roku is trading at a forward price to operating cash flow of 18, which remains attractive despite recent appreciation. An updated discounted cash flow analysis places Roku's intrinsic value per share at $138, up from $120 prior to the latest results, while the current market price stands at $127.

Both this model and market multiples suggest the stock is slightly undervalued, reinforcing the view that Roku remains a compelling growth opportunity in the streaming sector.

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