Roku has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 13.1% to $103.69 per share while the index has gained 10.1%.
Is now a good time to buy ROKU? Find out in our full research report, it’s free.
Why Does Roku Spark Debate?
With a name meaning six in Japanese because it was the founder's sixth company that he started, Roku (NASDAQ: ROKU) makes hardware players that offer access to various online streaming TV services.
Two Positive Attributes:
1. Total Hours Streamed Skyrocket, Fueling Growth Opportunities
As a subscription-based app, Roku generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.
Over the last two years, Roku’s total hours streamed, a key performance metric for the company, increased by 18.7% annually to 36.5 billion in the latest quarter. This growth rate is among the fastest of any consumer internet business and indicates its offerings have significant traction.
2. Increasing Free Cash Flow Margin Juices Financials
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Roku’s margin expanded by 14 percentage points over the last few years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Roku’s free cash flow margin for the trailing 12 months was 9.9%.
One Reason to be Careful:
Growth in Customer Spending Lags Peers
Average revenue per user (ARPU) is a critical metric to track because it measures how much the average user spends. ARPU is also a key indicator of how valuable its users are (and can be over time).
Roku’s ARPU growth has been subpar over the last two years, averaging 1.9%. This isn’t great, but the increase in total hours streamed is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if Roku tries boosting ARPU by taking a more aggressive approach to monetization, it’s unclear whether users can continue growing at the current pace.
Final Judgment
Roku’s merits more than compensate for its flaws, but at $103.69 per share (or 27× forward EV/EBITDA), is now the time to initiate a position? See for yourself in our full research report, it’s free.
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