Roku, Inc. (ROKU) pioneered content streaming for TV and has grown significantly over the past few years, operating through its two segments—Platform and Player. Its revenue has increased at a CAGR of 51.4% over the past three years. 

Since the onset of the COVID-19 pandemic, an increasing number of people have been shifting away from traditional linear TV toward a wide range of streaming ecosystems, thus helping ROKU grow in terms of number of active accounts.

Its healthy performance is also reflected in the stock’s 67.4% returns over the past six months. It closed yesterday’s trading session at $371.12. The company has also expanded its international reach and its TV  became the top-selling smart TV OS in Canada. However, ROKU is still in its early stages of building an international streaming video platform and we think it is  overvalued at its current price level.

Here’s what we think could shape ROKU’s performance in the near term:

Strategic Acquisitions

The company acquired the ‘This Old House’ business on March 19. The acquisition includes global distribution rights and all  subsidiary brands including the ‘This Old House’ and ‘Ask This Old House’ TV programs, the show libraries, all digital assets, and the television production studio. This Old House also entered a partnership and collaboration with YouthBuild USA on April 6, 2021 to encourage and empower young people to join  skilled trades.

Also last month, ROKU agreed to acquire Nielsen Holdings plc’s (NLSN) Advanced Video Advertising (AVA) business to accelerate the launch of an end-to-end dynamic ad insertion (DAI) solution with TV programmers. And in January, it acquired Quibi’s global content distribution rights, thus becoming the exclusive destination that streams more than 75 premium shows and documentaries that Quibi created in conjunction with Hollywood’s leading studios and production companies.

Solid Financials

For the fourth quarter ended, December 31, 2020, ROKU’s net revenue surged more than 58% year-over-year to $649.89 million. It surpassed 50 million active accounts in the quarter, driven by the popularity of its streaming players and its TV models. The company’s operating income for the quarter was  $65.15 million compared to a $17.38 million loss from operations in the prior-year period. Its net income also came in at $67.31 million compared to a net loss of $15.72 million in the fiscal 2019 fourth quarter. Furthermore,  its EPS of $0.49 for the quarter surpassed the Street EPS estimate by 1,080%.

Stretched Valuation

In terms of forward price/sales ratio, ROKU’s 18.87x is 882.8% higher than the industry average 1.92x. In terms of its forward EV/EBITDA ratio, the stock’s 286.63x is also higher than the industry average  10.56x.

Also, its forward EV/sales of 18.61x is 569.4% higher than the industry average 2.78x. And its forward price-to-cash flow ratio of 375.95x is also significantly higher than the industry average  10.25x.

POWR Ratings Don’t Indicate Enough Upside

ROKU has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. ROKU has a C grade for Growth. This is justified given that analysts expect its revenue to increase in the coming quarters but that its EPS will remain negative in fiscal 2021.

The stock has a C grade for Quality also, which is  in sync with its trailing-12-month gross profit margin of 45.5%, which is lower than the industry average  51%.

It has a D grade for Value, which is consistent with its significantly higher-than-industry valuation ratios.

In addition to the POWR Ratings grades we’ve just highlighted we’ve also given ROKU grades for Stability, Sentiment, and Momentum. Click here to get all ROKU’s ratings.

ROKU is ranked #40 of 48 stocks in the B-rated Technology – Hardware industry.

Better than ROKU: Click here to access 21 top-rated stocks in the same industry.

Bottom Line

ROKU has been able to dominate in the TV streaming space amid intense competition from the likes of Comcast Corporation (CMCSA) and AT&T Inc. (T) primarily because of the rise of streaming services such as The Walt Disney Company’s (DIS) Disney+ and NBC Universal’s peacock on its platform. However, given that its EPS is expected to remain negative in fiscal 2021 and it is still in its initial stage of international expansion, its sky-high valuations don’t seem to be justified. So, we think it’s perhaps better to wait for a better entry point. 

ROKU shares were trading at $382.00 per share on Tuesday morning, up $10.88 (+2.93%). Year-to-date, ROKU has gained 15.05%, versus a 10.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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