$ROKU — A Long Term Analysis | Continuation of Previous PostBack on August & nearly 100% ago I posted my $ROKU thoughts on Trading View:
I wanted to make this post a bit of a continuation as this is a trade I continue to stick with for the long term.
$ROKU is beginning to hit my first long term target of $300 - much quicker than I thought for better or worse. With 100% gains in just 4 months it is no doubt fair to say that $ROKU is overextended and hitting an upside target. I think it would be fair to say there's some potential RSI (but not TTM Squeeze) divergences and expecting a pullback at $300 wouldn't be the craziest thing; however, on this stock I am an investor, and I want to position myself for the long term.
First thing to note is that technically this run can go on for a while, even to my 2022 target of $775. The upward channel that has formed off March lows is powerful and reminds me of something like $NVDA, $AAPL, $ZM, $AMD that can ride a trend-lines up for a couple quarters to years. This uptrend is incredibly healthy and nothing in it suggests I should be concerned about a reversal.
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Look at the way $ROKU behaved before and after earnings. $ROKU was consolidating in the middle of its channel (not an easy buy or sell per channel), initially shot up after earnings only to sell back off; only then-after to push to new highs where we find it today. In fact, after earnings, $ROKU found itself nearly breaking down below $220: the strength in this stock is incredible and reflects a sustainable trend.
Building on this, it appears that CTV and streaming on the whole is getting repriced. Stocks like $FUBO, $CMCSA, $MGNI, $TTD are prime examples of this. COVID is driving forward the transition to programmatic advertising/streaming platforms and the market is attempting to price this. It is therefore par for the course that bears come in and complain these gains are "stay at home" related and will fade as vaccines come out. This seems like a bunch of nonsense to me. While COVID has certainly pulled demand forward, this transition is here to stay. Companies like $ROKU are dominating markets, $MGNI is being repriced after it was found to trade at a completely ridiculous valuation (low), $FUBO is being recognized as a potential huge growth "streaming pure play" stock.
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$ROKU is unique to me, however. Fundamentally it is too cheap. Assuming $ROKU will make 2.25B and grow at 40% (seems fairly "in line" to me), it will trade at about 16x sales. If you compare other companies like $SHOP or $TWLO with comparable growth and gross margins you find that $ROKU is a bit cheaper (but maybe not much) than both of these while presenting just as a compelling investment. This isn't unique though, there are many companies that trade at high p/s valuations due to a high sustainable growth rate. What is unique about $ROKU is how it acquires users and gets them into their ecosystem. This one point is so simple and yet so key to understanding the business. 1/3rd of the business sells hardware at cost while the other 2/3rds sells ads at 60-65% gross margins. (With this in mind, we might as well value for its ad business exclusively: 50-60% growth on likely 1.6-1.7B revenues, 60-65% gross margins - $ROKU trades at 22x its 2021 advertising business, this is well below comparable peers like $TTD, $DDOG that trade at well above 30x sales). By essentially giving away hardware, $ROKU can acquire a user to their platform. Once acquired the consumption numbers are staggering. "Total hours streamed" growth is absolutely astounding as is ARPU growth at the level of ARPU $ROKU sports. (Link to ER: ir.roku.com)
Fundamentally I argue, $ROKU has room to run still. In fact at $100B cap or $775 I see $ROKU as really just gaining the recognition that it deserves. It does not surprise me that $ROKU is at $300, and it will not surprise me if $ROKU pulls back a bit. I remain bullish on $ROKU for the long term as I am bullish on streaming & CTV in the long term. I am also long $MGNI $FUBO.
