Valued at $9.9 billion by market cap, Roku Inc. (ROKU) is a digital streaming service provider that serves its users in two categories: Platform and Devices. It allows its users to subscribe to various platforms such as Amazon (AMZN) Prime Video, Netflix (NFLX), YouTube, Hulu, Discovery+, Max, Paramount+, and Peacock. Under its Devices category, Roku markets products and accessories such as TVs, remotes, cables, stands, headphones, mounts, power adaptors, and more.
Established in 2002, the company has over 80 million streaming households and is regarded as the top streaming operator in the U.S. It's also a longtime holding of maverick investor Cathie Wood, head of Ark Invest. ROKU is the No. 3 holding in Wood's flagship Ark Innovation Fund (ARKK), right behind Tesla (TSLA) and Coinbase (COIN). Currently, ARKK holds a $552M stake in Roku, and the stock accounts for 8.67% of the fund's weight.
ROKU has had a turbulent year, down 24.5% on a YTD basis. However, the ARKK favorite is already up more than 43% from its August lows, suggesting the bottom may be in for now.
Roku Delivers Q3 Results
Roku posted its third-quarter results on Oct. 30. The streaming giant reported a loss of $9 million, which translated to $0.06 per share - much narrower than analysts' estimates for a loss of $0.35 per share. Roku reported revenue of $1.06 billion during the quarter, against estimates of $1.02 billion.
EBITDA reached $98.2 million, widely beating analyst’s $47.33 million estimates, while its EBITDA margin also shot up to 9.2% from last year’s 4.8%. Gross margin dipped to 45.2% from 47.7% reported in the same quarter last year, but its operating margin improved to (3.4%) against last year’s (38.4%).
Roku ended Q3 with a cash reserve of $2.12 billion, up from last year’s 2.02 billion.
Roku’s management expects Q4 revenue of $1.14 billion, reflecting a 16% rise YoY, with Platform revenue growing 14% YoY and Devices Revenue seeing a 25% rise. That came in ahead of Wall Street's forecast - but guidance for a gross profit of $465 million and adjusted EBITDA of $30 million both fell short of consensus forecasts.
As a result, ROKU stock cratered 17% in a single day after earnings on Oct. 31.
Analyst Upgrades Roku
After earnings, Baird analysts upgraded the stock from “Neutral” to “Outperform,” suggesting that the Q3 reaction was slightly overdone.
“We think the stock reaction to the recent 3Q print was more reflective of dynamics around near-term expectations and investor positioning, rather than the fundamental quality of the update. Specifically, we think investors may be overlooking the magnitude of outperformance in F24 and the signs of sustainable growth moving forward,” wrote the brokerage firm in a note to clients. "As a reference point, consensus F24/F25 revenue/adjusted EBITDA estimates moved higher post-3Q, but the shares are still down vs. the print."
Analysts are positive on ROKU stock overall, with a “Moderate Buy” consensus rating among the 25 in coverage.
The mean price target of $81.28 suggests that ROKU could rise another 17.5% from Friday's close, while Baird's newly raised price target of $90 suggests an upside potential of 30%.
