Roku, Inc. (ROKU) offers streaming devices for delivering entertainment to the television platform. The company also offers a Roku software developer kit that enables developers to build a channel that streams their content to the TV. It provides advertising products and licenses under the Roku TV name and operates through two segments — Platform and Player. It provides its product and services through retailers and distributors, as well as directly to customers through its e-commerce website.

ROKU is one of the best-performing stocks in 2020, with record revenue and income growth. In the third quarter ended September 2020, total net revenue increased 73% year-over-year to $452 million, as streaming hours rose 200 million hours to 14.8 billion and average revenues per user increased 20% year-over-year to $27. EPS for the quarter came in at $0.09, compared to the year-ago loss of $0.22 per share. 

With the robust growth in the demand for entertainment content amid the pandemic, the stock has gained 62.1% year-to-date. This impressive performance and the potential upside based on several factors have helped it earn a “Buy” rating in our proprietary rating system.

Here is how our proprietary POWR Ratings system evaluates ROKU:

Trade Grade: A

ROKU is currently trading higher than its 50-day and 200-day moving averages of $199.68 and $142.02, respectively, indicating that the stock is in an uptrend. The stock’s 41.9% return over the past three months reflects a solid short-term bullishness.

Active account growth continued to accelerate in the third quarter. ROKU added 2.9 million accounts during the quarter. Active accounts rose 43% year-over-year and reached 46 million due to strong sales of players and Roku TV models in both the United States and international markets. Moreover, player unit sales grew 57% year-over-year, resulting in ROKU’s strongest year-over-year player revenue growth in over seven years.

In October, ROKU introduced the all-new Roku Ultra and unveiled the Roku Streambar for streamers looking to add powerful streaming and premium sound to any TV. The company has recently expanded its presence in Brazil with the launch of the Roku Express player. On the software side, ROKU rolled out Roku OS 9.4 that offers customers new ways to access content quickly with a range of performance enhancements.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, ROKU is fairly positioned. The stock is currently trading 15.1% below its 52-week high of $255.66.

Looking at the past three years, the stock has grown more than 660%. ROKU’s top-line has increased at a CAGR of 45.7% in the same period. While ROKU initially relied on its set-top boxes and dongles to generate revenue, in the last two years, its Platform business accounts for the majority of sales. It also launched a mobile app, which lets users stream on their smartphones.

ROKU is growing by adding several streaming players to its platform. It has recently signed a deal with Comcast Corporation (CMCSA) to distribute Peacock and includes NBCUniversal content in The Roku Channel. However, this exponential growth has stretched ROKU’s valuation. It is currently trading at a price-to-sales (P/S) of 19.7x., which is more than double the streaming giant Netflix’s (NFLX) 8.7x.

Peer Grade: B

ROKU is currently rated #6 out of 30 stocks in the Technology – Hardware group. Other popular stocks in this group are Dell Technologies Inc (DELL), Logitech International (LOGI), and GoPro, Inc. (GPRO). While LOGI beat ROKU by gaining 65.7% year-to-date, DELL and GPRO returned 25.7% and 55.5%, respectively, over this period.

Industry Rank: B

ROKU is part of the StockNews.com Technology – Hardware industry, which is ranked #47 out of the 123 industries. The companies in this industry manufacture PCs, cameras, streaming devices, and related accessories. The profitability of individual companies depends on technological innovation and anticipating customer requirements. Since the onset of the pandemic, the industry has witnessed an accelerated demand as school closure, shelter-in-place guidelines, and rising unemployment have given people more time to engage in social viewing.

Overall POWR Rating: B (Buy)

Overall, ROKU is rated a “Buy” due to its impressive financial performance, robust demand for TV streaming products, the expansion of partnerships for content distribution, and short-and-long-term bullishness, as determined by the four components of our overall POWR Rating.

Bottom Line

The developed world has seen a massive shift in the way content has been consumed in the last few years. This phenomenon, also known as cord-cutting, has meant millennials are increasingly streaming content rather than watching it on cable TV. Cord-cutting started half a decade before the pandemic struck, and the world isn’t going back to traditional broadcasting any time soon.

Despite soaring so far this year, ROKU has the potential to grow even further based on its favorable earnings, upcoming holiday season demand, and a strong rebound in the advertising segment. The stock seems overvalued by traditional measures but not big enough to override very strong fundamental growth trends.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is pretty impressive for ROKU. The average broker rating of 1.42 indicates a favorable analyst sentiment. Of the 24 analysts that rated the stock, 16 have given it a “Strong Buy” rating. The consensus EPS estimate for the next quarter indicates a 19.5% increase year-over-year. This outlook should keep ROKU’s price momentum alive. 

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ROKU shares were trading at $228.42 per share on Wednesday afternoon, up $11.44 (+5.27%). Year-to-date, ROKU has gained 70.59%, versus a 12.55% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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