Investors in streaming pioneer Roku have had to weather some pretty extreme price swings over the past four years, but they have managed to come out on top. But even though the stock reached a new all-time high over the summer, as SVOD and other streaming services begin to see take rates slow as their services begin to mature, Roku shareholders may have to take a step back and evaluate if the ride, up until now a very profitable one, is worth the risk.
Roku shares have had their ups and downs over the past few weeks, rising as high as $350.60 per share on Oct. 19 to as low as $233.86 earlier today (Nov. 22). Driving much of that nearly $120 per share swing has been anticipation leading up to the release of its Q3 results on Oct. 20, and the aftermath of a downgrade to “sell” by MoffettNathanson media analyst Michael Nathanson. Nathanson lowered his 12-month price target on Roku shares from $330 to $220. The stock fell about 11% on Nov. 17, closing at $245.11 each and has been inching toward that low target price ever since, closing at $234.10 on Nov. 19 and $230.98 on Nov. 22.
As detailed in this May 2020 Next TV feature, Roku has long charted a jagged line graph on the Nasdaq.
Roku went public on Sept. 28, 2017 and rose sharply in its first two days of trading, nearly doubling its price in its second day of trading to $29.80 each before closing at $26.54 per share, up about 68% from its opening day on the market. The next two trading days -- Oct. 2 and Oct. 3 -- Roku stock fell a collective 21% to $20.81 each. It was as if the company was telling the market early on that this ride was going to be a bumpy one.
Since then Roku has established itself as one of the more volatile stocks in the entertainment sector -- it has lost or gained 10% or more of its share price in a single day 45 times since its IPO. While so far the gains have outweighed the declines -- Roku stock has been up 10% or more for 29 of those days, and declined more than 10% for 16 of those days -- most of the volatility in the stock has been event-driven.
Despite those dramatic ups and downs, in the past two years Roku stock always managed to recover, finishing 2019 up 337% and 2020 up $148%. But this year, despite hitting its all-time high price of $490.76 on July 27, Roku stock is down 30% for the full year.
Like cable stocks, Roku shares tend to sink or swim around earnings -- its biggest one-day gain in the past four years was a 54% rise on Nov. 9, 2017 after it released quarterly results for the first time as a public company, soundly beating estimates. Its worst single-day performance was a 22.3% dip on Nov. 8, 2018 after it missed platform revenue expectations in the third quarter. In between there have been peaks and valleys around product launches, discount offerings (opens in new tab), and competitive fears. Kind of the same thing that drives other cable stocks.
But Roku is NOT a cable stock, and that is proven simply by looking at its price appreciation since Sept. 28, 2017 (1,381.6%), compared to Comcast (49.7%), Charter (90.7%), Altice USA (-39.5%) and Cable One (156.5%) in that same time frame.
Roku is a streaming stock, and it has ridden that wave for nearly four years. But after nearly half a decade of Surf’s Up, Roku may be headed for calmer seas.
In his research note, Nathanson wrote that companies that meet or beat quarterly expectations usually get a pass from intense scrutiny -- no one asks the tough questions if there isn’t anything to worry about. For Roku, the assumption has been that the strong ad-supported video-on-demand and connected-TV markets were the big catalysts for Roku’s revenue performance.
“The company’s lack of disclosure and consistent quarterly narratives didn’t provide many alternative views or clues,” Nathanson wrote. “However, over the past few months, we have started to question that thesis and the core assumptions in our model.”
Nathanson added that now he believes that a lot of Roku’s growth has been tied to new SVOD service launches, which are headed for a slowdown.
“While there is no doubt that advertising was a significant driver of Roku’s revenue upside, a material part of the company’s growth has come from third-party SVOD-related revenue contributions, which are obviously set to slow,” Nathanson wrote.
It’s already happening. In Q3, Disney Plus added 2.1 million domestic subscribers, well below past performance. Consolidation also is expected to play a role, as the pending Discovery/Warner Media combination and the potential sale of Starz is bound to have some effect on their respective streaming services.
Nathanson estimated that direct-to-consumer streaming services added about 7.8 million new customers in Q3, a “notable” slowdown from the double-digit increases of the past few years.
As a result, Nathanson lowered his ad revenue, total revenue and adjusted EBITDA estimates for Roku through 2025. While he still believes the company will achieve $1.245 billion in video ad revenue in 2021, he now expects that to slow to $2 billion in 2022 (down from his prior estimate of $2.1 billion), and to $4.865 billion by 2025 (down from the prior mark of $6.375 billion). Total revenue estimates, unchanged at $2.798 billion in 2021, is expected to be $7.461 billion in 2025, instead of his previous prediction of $8.971 billion. And adjusted cash flow, at about $466 million in 2021, is now expected to be about $1.378 billion in 2025, instead of $1.827 billion.
“Simply put, we think our and the Street’s long-term revenue and earnings estimates are just too damn high,” Nathanson wrote. Using a series of comparable data points and third party research, it appears that Roku will need to monetize an absurdly high portion of long-tail AVOD impressions to come even close to Street numbers, which we think will be a challenge given rising competitive pressures in TV OEMs and operating systems.”
While Nathanson has taken the bear stance on Roku, not every analyst agrees. In a research note Nov. 3, Evercore ISI Group analyst Shweta Khajuria wrote that despite a rocky Q3, she believes there is still a lot of upside for the stock.
“We would be buyers on a dip,” Khajuria wrote, adding that while supply chain headwinds are likely to persist into the first half of next year, as the broader environment normalizes, Roku should benefit from linear TV ad revenue moving to connected TV, inline with viewing hours shifting to streaming.
“Our long term thesis is intact – Roku has scale, with 56.4 million Active Accounts making it an essential ad platform for all major advertisers; superior measurement capabilities that should present a clear value proposition vs. linear TV; expanding TAM potential with Ad product innovations (OneView, etc.); early innings of international expansion; and better monetization of the Roku Channel,” Khajuria added. ■
Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.
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