Slashing Roku Stock Fair Value to $150

Roku (ROKU) posted a mixed end to 2021 but shares fell over 20% in aftermarket trading on Feb. 17 due to weak 2022 revenue growth guidance of 35%, significantly below the 55% mark posted in 2021. Management also noted that the firm expects to ramp up operating expense spending that was pulled back in 2021 due to COVID-19 uncertainties. As a result, management expects 2022 adjusted EBITDA to be flat with 2020 on an absolute basis, implying a $300 million drop from 2021. While we view the EBITDA guidance as conservative, we are slashing our fair value estimate to $150 from $195 to account for lower top-line growth and much slower margin expansion.

While management believes that the firm’s investment in more headcount and in the development of the RokuOS will drive greater revenue growth down the road, we remain skeptical. The landscape for streaming devices and software is very competitive, with many players having much deeper pockets. Additionally, we expect Google and Amazon to remain very aggressive in both pricing and incentives to lure TV manufacturers over to their OSes, which Roku may try to match. We also believe the continued investment in content may backfire on the firm as the streaming landscape contains many participants from both media and tech that are ramping their content spending.

Roku posted decent revenue growth of 33% during the quarter as both operating segments continue to be hurt by the supply chain constraints. The firm added 3.7 million accounts, ahead of 1.3 million last quarter but well below the 5.0 million added a year ago. Active accounts broke the 60 million mark for the first time. Streaming hours grew 15% year over year to hit a high of 19.5 billion. Streaming hours per account increased slightly sequentially to 3.6 hours per day. Average platform revenue per account continues to improve, increasing 43% on a trailing 12-month basis, as the firm is benefiting from both higher pricing and larger ad inventory.