TV streaming platform Roku, Inc. (ROKU) has been going through a purple patch. According to Nielsen, while viewing hours on traditional TV in the U.S. declined by 13% year-over-year, ROKU’s users streamed 25.1 billion hours in Q2, representing 3.8 Streaming Hours per Active Account per day, up 21% year-over-year.
Consequently, for the fiscal second quarter that ended June 30, ROKU surpassed Street expectations by increasing its revenue by 10.8% year-over-year to $847.2 million and narrowing its loss by 7.3% year-over-year to $0.76 per share.
This outperformance triggered a rally of nearly 10%, which has resulted in the stock surging by more than 45% and 96% over the past six months and year-to-date, respectively.
Beyond the financial performance, on June 27, ROKU announced that it would become the U.S. streaming home of Formula E, the electric vehicle-powered auto racing series, with live and on-demand replays of races. This has made it the company’s first-ever live sports rights package at a time when streaming companies are rushing to secure sports broadcasting rights amid growing industry competition.
The company launched Roku-branded TVs (the first TVs designed and made by Roku) in March to offer consumers even more choices and enable more innovation across the Roku TV program. Best Buy is the exclusive retailer for TV, and all 11 TV models have received strong industry reviews and customer ratings of 4.5 (out of 5) stars or higher.
Moreover, in July, ROKU announced partnerships with FreeWheel and Shopify Inc. (SHOP) to bring a suite of industry solutions to unlock the full value of streaming TV for advertisers and publishers and the ability to purchase products from SHOP merchants directly from their TV through Roku Action Ads for viewers, respectively.
Given the tailwinds, for the fiscal third quarter, ROKU expects total net revenue of roughly $815 million and a total gross profit of roughly $355 million. Moreover, Statista forecasts the number of U.S. households with cable TV packages to be down 40% from a decade earlier.
Hence, it’s unsurprising to find analysts expecting ROKU’s revenue to increase by 7.6% year-over-year to $3.36 billion in 2023 and by another 15.3% to $3.88 billion in 2024.
However, anticlimactically, Cathie Wood, the founder, CEO, and CIO of Ark Invest, an investment management firm whose flagship fund, ARK Innovation ETF (ARKK), sold shares of ROKU worth $13.1 million.
ARKK, which seeks to generate long-term capital appreciation by investing in businesses across the globe that seek to benefit from disruptive innovation, alone sold 138,221 shares of ROKU. Despite the sale, the AMC still owns 8,697,614 shares of the streaming company, valued at around $770 million, and the holding is weighted at 9.3% of ARKK's portfolio.
Nevertheless, the $13 million move, albeit amounting to a little above 1% of ARK’s stake in ROKU, has raised eyebrows. However, the move makes sense in the context of valuation.
In terms of the forward EV/Sales multiple, ROKU is trading at 3.11, which is 66.4% above the industry average of 1.87. Similarly, the stock’s forward Price/Sales and Price/Book multiples of 3.43 and 4.93 are significantly higher than the respective industry averages of 1.22 and 1.99.
Such a frothy valuation seems unsustainable for a company that’s yet to turn in a profit and is operating in a competitive and overcrowded sector that has of late found the going tough due to an attention recession to the reopening of the economy after the pandemic, softened demand due to a year-long ordeal with inflation, muted TV advertising, and, of all things, strikes among Hollywood actors and writers.
Hence, while the stock is still trading above its 50-day and 200-day moving averages of $71.84 and $60.05, respectively, it is not difficult to see how the tide might have already begun turning. Moreover, with a 5-year beta of 1.76, volatility also remains an issue.
In view of the above, it could be wise for investors to hold their horses and wait for ROKU to become profitable or for its valuation to become more attractive before acquiring a stake in the streaming giant, aspiring to go full steam ahead.