Roku Stock: New Life (NASDAQ:ROKU)

The video streaming hype led Roku (NASDAQ:ROKU) to unprecedented heights and now the stock has collapsed due to the current streaming wars. ARK Investment Management (ARKK) led by Cathie Wood sees a scenario where the stock rallies 7x by 2026 due to the constant shift to video streaming. My investment thesis finds the case more Bullish for the stock at $100, but the business model still has a lot of challenges to even think about a price target of $605, much less the bull case of $1,493.

Shift To Advertising

My original negative view on Roku had as much to do with the streaming video shift where consumers went from spending $100+ on a cable package to a couple of streaming services at far lower prices. The main benefit of video streaming services was better quality services with ease of access to consumer interests.

The end result was consumers easily cancelling services and cutting costs in the process of shifting from linear TV. In addition, Roku appeared far too focused on content distribution easily transferrable to other competitors and a function that other DTC video streaming services hoped to avoid when moving to streaming.

According to ARK Invest, the big shift in the business is a move toward video advertising. Even Netflix (NFLX) is looking towards shifting the business from a subscription only model to one where advertising contributes to revenues with some consumers unwilling or unable to pay a monthly subscription fee.

The Ark Invest base case is for Roku to generate impressive 2026 revenues of $14.4 billion. Under a Bear case, the company would see revenues only grow to $3.6 billion, up from $2.8 billion last year.

The analyst community generally appears to agree with Cathie Wood on the positive momentum of the business considering the current 2024 revenue target is $5.8 billion. Analysts see Roku reaching the Bear case revenues this year and at least approaching half the Base case by 2026.

The major thesis of the revenue boost is a logical increase of global households connected with TVs leading to Roku Active Accounts tripling. ARK Invest forecasts CTVs growing to 1,253 million in 2026, up from 739 million now. This number doesn’t appear much of a stress, the big question is whether Roku can triple Active Accounts to 157 million.

In the process, Daily Hours streamed on the platform will grow approximately 25% per day to 4.5 hours and the monetization will surge. The gross platform rate per hour would reach $0.21 and the net platform rate would grow 60% to $0.05.

A big key in the model is the shift to AVOD (advertising-based video-on-demand) services. Most importantly, Roku could grow 10% of total streaming hours from The Roku Channel to 15% in a Base case and 18% in a Bull case. Those additional hours streaming internal content will lead to far higher monetization via OneView.

The biggest question to the thesis is whether Roku can actually gain more viewership on The Roku Channel with so many services switching to AVOD models. Both Netflix and HBO Max are set to offer services likely to attract the vast majority of the video advertising market.

A lot of the other numbers from ARK Invest make sense with consumers switching more and more to video streaming services and Roku participating in the growing pie. Ad budgets will continue to shift from linear TV to digital TV services again contributing to Roku growing their revenues.

On top of this issue, the sector will have to contemplate how to generate profits with original content, as opposed to just driving revenue growth in the sector. More and more consumers are shifting to steaming, but content costs are continuing to rise as various services fight over top talent to create the content. As an example, Tom Cruise is predicted to now hit a paycheck of up to $100 million for Top Gun: Maverick after agreeing to a deal for a $12.5 million base pay and 10% of certain profits.

Safety Net

While the ARK Invest call appears far too bullish considering Roku would have to compete with the likes of Netflix working with Google (GOOG, GOOGL) for video ad dollars, the Bear case does provide a level of safety here with Roku trading at only $89. The stock hardly budged at the opportunity for a 600% gain in another bullish sign the stock is completely washed out.

Roku only trades at 2.5x 2023 sales targets in another positive sign that investors might have some protection to the downside while allowing for the bullish call to play out. The company isn’t expected to be profitable even next year again leading to investors not jumping on the bull case.

The company is already EBITDA profitable providing another level of safety here. The stock is down from a peak of nearly $500 to only $89 now. Roku did forecast adjusted EBITDA at only breakeven in Q2’22 due primarily to inflationary pressures along with reduced TV unit sales along with lowered ad spend.

In essence, Roku is struggling to generate profits despite 25% growth in the ultimate Bear case. Higher revenues are constantly met with higher costs in the video streaming sector.

Takeaway

The key investor takeaway is that Roku is very beaten down here while the company has the opportunity to grow revenues in a video streaming pie that should continue expanding. The stock appears to account for a lot of bearish scenarios trading at just 2.5x 2023 sales while the ARK Invest Base case offers potential upside for Roku based primarily on a promising shift to video advertising to attract more streamers and move away from a reliance on third-party content to growth the business.