Roku Incorporated (NASDAQ: ROKU)
February 13th, 2020
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Roku is an American company that specializes in the manufacturing of devices that provide a wide range of streaming and television channels. Roku’s stock was first made public through NASDAQ on September 29th, 2017 at an IPO price of USD $14 and at an opening price of USD $26.54.
Historical Stock Value
Roku’s stock shows that between 2017 and 2018 the stock experienced gradual increases and decreases in value which resulted in the stock having nearly the same value as its initial opening price near the end of 2019 or almost no growth since the date of the initial public offering. In 2019, the stock experienced massive growth, reaching a peak price of USD $169.86 before falling and closing at a year-end price of USD $133.89, a 404.48% increase from its initial opening price.
Figure 1: Roku’s Stock Graph (February 12th, 2020)
Overall, Figure 2 shows that Roku’s stock has experience large amounts of growth in every month where the price changes have been positive. The stock’s price fell heavily in September due to a poor future outlook at the time after the 3rd Quarter earnings were released. The decreases in value in the other months are relatively smaller than the monthly increases which resulted in an upwards trend between these last 12 months.
Roku’s recent annual reports (Refer to Figure 3) show that the total revenues are increasing at a faster rate than the cost of revenue, an indication of increasing efficiency in its production. However, its operating expenses were shown to be increasing at faster rate than its revenues, therefore showing that Roku lacks efficiency in that area.
Figure 4 shows that Roku has nearly outpaced its 2018 total revenue earnings in its first 3 Quarters of the 2019 period but has incurred larger net losses due to larger operating expenses. This could be partially blamed on Roku’s international expansion efforts.
The combined Quarters has a Gross Margin and Operating Margin of 46.48% and -6.64% respectively. This is a slight improvement from 2018’s Gross Margin of 44.73% but the Operating Margin is nearly 5 times worse from 2018’s value of -1.79%.
Implications and Verdict
Overall, there are many positive factors that point to Roku’s stock value increasing in the future term:
- The growing streaming market with a compounded annual growth rate of 20.4% per year starting in 2020 (estimated value of USD $184 Billion by 2027);
- Reduced competition for viewers as a result of obsolesce of cable television;
- Roku’s access to large streaming services such a Netflix and the recently released Disney+ as well as direct access to some cable networks;
- The recent coronavirus outbreak forcing more people to stay home and stream content/use the internet to pass the time;
- The stock hasn’t fully recovered from the drop when it reached it’s all time high value, the stock must grow 22% for it to reach that same peak;
- Roku’s focus on revenue after its acquisition of DataXu, a company that helps marketers plan and buy video ad campaigns.
The most important factor that will determine Roku’s stock price for the near future will be its 4th Quarter earnings report which will be released on February 13th, 2020 after the stock market closes. The stock will likely rise if Roku releases an earnings report that beats analyst expectations especially in the case where the coronavirus is beneficial to Roku’s revenue. But one must be weary in the case where negative news (such as poor future outlook) may come along with the report and instead cause the stock price to drop no matter the result of the earnings report.
It is recommended that for risk-takers who believes that the stock will rise after the earnings report is released, a call option should be purchased today. Risk-averse investors who have the same beliefs should consider purchasing the stock itself to mitigate any potential losses.