Over the last few years, there has been an increase in demand for streaming services, as consumers shift away from traditional cable TV towards on-demand internet-based content. Roku (ROKU) capitalized on this shift by providing a versatile streaming platform, and the stock soared 125% last year, outperforming the S&P 500's ($SPX) 25% gain. Revenue has consistently increased, thanks to a combination of increased user engagement and advertising revenue.
This year, however, luck has not been on Roku's side. While its fourth-quarter results were positive, management's soft outlook for the first quarter and investor concerns over Walmart's (WMT) acquisition of rival Vizio have dragged down its stock by 29.5% year to date.
Nonetheless, Wall Street remains optimistic about the company's prospects. The consensus average price target of $84.19 implies a potential upside of 30.4%, while the high target price implies expected upside of 86% in the next 12 months. Let's see if Roku is a good buy right now.
Roku Stock Slides, Despite Robust Quarter
On Feb. 15, Roku reported its fourth-quarter and full-year 2023 results. While the results were positive, investors and analysts were disappointed with the growth momentum of Roku's platform revenue, which comes from content distribution and video advertising.
For context, Q4 platform revenue increased 13% year-over-year to $828.9 million. However, management stated that Q1 2024 platform revenue will be similar to Q4, as the company navigates macroeconomic challenges and an uneven ad market recovery. This bleak outlook has dragged down its stock by 32% since the earnings release.
Notably, platform revenue makes up a significant portion of Roku's total revenue, with device revenue accounting for the remainder. The company introduced Roku-branded TVs in early 2023, which contributed to an 18% increase in device revenue in 2023. In addition to being exclusive to Best Buy, Roku TVs are now available at Costco (COST) and Amazon.com (AMZN).
Furthermore, in 2024, Roku will launch the Pro Series TVs, which will cost $1500 and be available in the U.S. by spring. The new products should boost future revenue in the devices segment.
Overall, net revenue increased 11% in Q4, totaling $3.5 billion for the year. Active accounts of 80 million and streaming hours of 100 billion for 2023 helped increase platform revenue by 10% for the full year.
The company also reported a positive adjusted EBITDA of $4.3 billion for the full year, earlier than its initial target of 2024. However, the company remains unprofitable.
Management emphasized their commitment to achieving this goal in the Q4 shareholder letter, stating, "We plan to increase revenue, free cash flow, and achieve profitability over time."
Roku did generate positive free cash flow of $175.9 million in Q4, which was another first for the company. Roku's positive FCF balance will help it manage its debts and invest in the future. Roku also ended 2023 with cash and cash equivalents of $2.02 billion.
Looking ahead, the company expects $850 million in net revenue during the first quarter, with analysts forecasting $851.9 million. Management also expects to report positive adjusted EBITDA in the first quarter and full year 2024.
Furthermore, analysts predict that Roku's revenue will increase by 11.8% to $3.9 billion in 2023, followed by 13.4% in 2024. Since it is not profitable, we will look at Roku’s price-to-sales ratio for valuation purposes. The stock trades at two times forward 2025 projections, making it a reasonable growth stock to buy now.
What Is The Stock Price Prediction for ROKU?
On Wall Street, the average price target for Roku stock is $84.19, suggesting a potential upside of roughly 30.4% over the next 12 months. Furthermore, the Street-high target price of $120 implies that the stock could rise by up to 86% from current levels.
Following the Q4 results, analysts' opinions on Roku are mixed. Some experts remain bullish, citing the company's strong financials, expanding user base, and strategic partnerships as positive factors that could drive the stock. A few others are concerned about the competitive landscape and potential difficulties in maintaining platform revenue growth rates.
For instance, Piper Sandler analyst Matt Farrell took a neutral stance on ROKU. The analyst believes the company’s outlook for flat platform revenue in Q1 seems to have disappointed Wall Street. However, Farrell is impressed by Roku's improved FCF and large cash balance. The analyst has a "hold" rating and a price target of $81.
Similarly, Oppenheimer analyst Jason Helfstein believes the stock will struggle for some time until the company's platform revenue accelerates. Helfstein reduced the stock's rating from "strong buy" to "buy."
On a more positive note, Wedbush analyst Alicia Reese described Roku's fourth-quarter results as "almost perfect."
Overall, analysts rate the stock a “hold.” Out of the 24 analysts covering Roku stock, six have a “strong buy” recommendation, one rates it a “moderate buy,” and 13 suggest a “hold.” The stock also has 1 “moderate sell” and 3 “strong sell” recommendations.
The Bottom Line on Roku Stock
While Roku is profitable from an operational standpoint, EBITDA does not reflect true profits. Roku's growth potential lies in its ability to sustain and expand its user base, improve its advertising capabilities, and navigate through the competitive streaming industry.
For 2024 and beyond, Roku believes its huge volume of content and live events on streaming, combined with the ad-supported options available to consumers by streaming services companies, will help the company drive revenue in the years ahead.
While Wall Street believes the stock has significant upside potential this year, I would advise caution until the company becomes profitable. As a result, I maintain a neutral position on Roku's stock.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
