Roku - Stuck In A Rut

For this is the message that you heard from the beginning, that we should love one another,

1 John 3:11

As a Christian, there are two key rules to sum up what my main responsibilities are. First to love God with all my heart, soul, and mind; second to love others as I love myself. It’s very easy to love myself, I do it naturally all the time. It is much more challenging to think about others without my bias or judgment, and to acknowledge their circumstances and differences from my tendencies or decisions, and to love and care for them. This is Jesus Christ’s desire for me.

For investing, it’s not about loving one another, but instead, the similarity relies in denying my selfish desires. I may want to own a certain stock for any number of reasons, but it may not be the right time to initiate or accumulate. I may think a company is overvalued, or not worth anyone’s time, but the market may be focusing on a short-term opportunity or investor momentum may be driving the stock. In any case, managing emotions as a Christian is very much a crosswalk to managing strategies for investments.

Roku, Inc. (ROKU) has been stuck in a rut for a while now. The past five-year performance has been negative as illustrated above. ROKU has witnessed its stock price jump towards or over $100 numerous times only to see it fall back towards the $50 level since the pandemic overvaluation collapse.

Traders have been able to capitalize on this divergence, but for longer term aggressive growth investors, the question becomes can ROKU break of this rut? The short answer is not likely over the mid-term, as ROKU’s recent return towards $100 per share has once again placed the company in an overvalued state.

So, what’s ROKU’s primary issue?

There are essentially a couple of challenges with ROKU’s recent performance. First is that while ROKU’s active accounts are still increasing at double-digit rates, the company’s core monetization through advertising has flatlined since 2021 via ARPU. If we consider companies like Meta, Inc. (META), Pinterest, Inc. (PINS), Netflix, Inc. (NFLX) among others, ARPU equivalent metrics are what tends to be a primary catalyst towards exponential financial growth and performance.

Interestingly, ROKU active accounts have witnessed improving streaming hours metrics both in aggregate and daily despite the pandemic lull on the daily metric side. This is an indication that as ROKU continues to see its platform take market away from viewing hours each day, that this is not translating to increasing monetization in a healthy manner.

The second issue for ROKU has been valuation. Clearly during the pandemic, ROKU was impacted by the extreme overvaluation bug that hit everything growth oriented. Since then, the company’s two key financial valuation metrics have witnessed opposing shifts. While ROKU’s EV/Sales metric has improved, the company’s cash flow metrics have remained elevated, again due to a lack of ability to increase monetization at a higher rate off of ROKU’s accounts.

While ROKU’s cash flow performance has seemingly improved, not much nominal performance has occurred since 2021, clearly correlating with the monetization thesis. ROKU’s current operating cash flow margin stands at just over five percent. While a company like NFLX was able to “turn on” cash flow once growth slowed, ROKU is in a far different situation where the degree of monetization of available accounts is far less than NFLX, as well as the degree of ROKU’s developed content versus third-party content where the company is unable to generate as much monetization.

Longer-term investors need to be asking themselves about these challenges ROKU is facing today. Based on the recent run-up, risk/reward for the long-term does not look good and at some point, Wallstreet will look to bring ROKU down as has occurred several times over the past few years.

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