Roku stock is down now, but it could go up 10x

Few stocks fell this much during the 2022 tech crash. Roku (Roku 0.19%).

Roku’s stock price fell more than 90% from high to low as stocks and industries that had boomed during the pandemic collapsed as they reopened. Streaming media was one of them.Streaming sign-up with services like Netflix (NFLX 1.50%) It soared during the pandemic, but hit a wall in 2022. Roku was also a victim of that trend.

The company’s business is primarily driven by streaming growth and digital advertising, both of which saw a sharp slowdown in 2022. At the same time, Roku increased spending, leading to widespread losses. The following graph shows how the company’s revenue growth slowed during this period, turning profits into losses.

ROKU Revenue (Quarterly YoY Growth Rate) Data by YCharts

Revenue growth plummeted in 2022 and remained roughly flat for two consecutive quarters before recovering recently. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) followed a similar trajectory, actually turning positive for the first time in years in the third quarter, excluding costs related to layoffs.

Image source: Getty Images.

rebound in progress

Roku’s stock is still down about 80% from its pandemic-era peak, but the business is clearly moving in the right direction.

In the third quarter, the number of active accounts on the platform increased by 16% to 75.8 million, and the number of hours streamed increased by 22% to 26.7 billion hours, showing that usage of the platform continues to steadily increase. . Revenue growth also improved to 20%, the fastest pace in six quarters, as advertising demand recovers.

Roku went through three rounds of layoffs, trimmed its cost structure, and was able to return to positive adjusted EBITDA after several quarters of losses. In this indicator. Roku reported third-quarter revenue of $912 million and adjusted EBITDA profit of $43 million.

But it’s not just its own numbers and improving digital advertising demand that are driving the company’s recovery.

With the arrival of major streamer Netflix, ad-based streaming is finally becoming mainstream. disneyand Amazon Everyone accepts that. Consumers also crave this option. Netflix said in its fourth-quarter earnings report that ad-based subscriber numbers grew 70% quarter-over-quarter, with 40% of new subscribers in ad-enabled markets choosing the ad-based tier.

This is good news for Roku, as major streaming platforms typically get 30% of their ad inventory from their streaming service partners. So the more advertising tiers sign up, the more money should end up flowing to Roku.

Why Roku can multiply by 10x

It’s not easy to get 10x in any stock, but Roku has a chance to do it. The video entertainment market is huge. Streaming accounts for less than half of video consumption in the US, and much less in other countries. Market share will continue to shift from linear TV to streaming.

The stock price is also small, and there is plenty of room for the stock to increase 10x. First, its market cap is $13 billion, so it wouldn’t be unreasonable for a major streaming platform to reach a market cap of $130 billion over the next 10 years, especially if Roku can maintain its user growth rate.

Although the company is not currently profitable, its price-to-sales ratio is less than 4x, which is high enough to give the stock plenty of upside potential.

If Roku can increase its revenue by 20% over the next 10 years (which seems achievable given its shift from linear to streaming and adoption of ad-based streaming), its revenue would go from $3.45 billion to $21.4 billion. This would be an increase of nearly 7 times. a billion. This can easily happen because if the price to sales multiple expands to his 6x, the business is likely to be profitable by that point. The stock price will increase 10 times. At a 10% profit margin, Roku’s stock would trade at about 60 times earnings, which is not unusual for a popular company in a fast-growing market.

If Roku executes, there is a chance. The company needs to continue attracting new users, gaining market share and building ad inventory with the help of streaming partners, but it’s one of the best prospects for 10x growth over the next decade. It seems like it will happen.