Justin Sullivan
Roku (NASDAQ:ROKU) shares are down 15% since the company reported fourth-quarter results in February. However, the streaming company surprised the market by forecasting EBITDA profitability in fiscal 2024, which I think is the most important thing for Roku. Shares have been trending lower recently, in part due to the financial and solvency issues surrounding SVB Financial Group (SIVB). The group’s Silicon Valley bank holds the deposits of many startups, including Roku, which raised concerns last week that the streaming company might not be able to access its funds. However, the Fed stepped in over the weekend and guaranteed all of Silicon Valley Bank’s deposits, which should ease Roku’s valuation. I believe Roku’s decline is a buying opportunity as the company’s streaming business will continue to grow!
Data from YCharts
Roku’s disclosure about his relationship with Silicon Valley Bank
Silicon Valley Financial Group is the holding company of Silicon Valley Bank (SVB), which went out of business last week after bad bets on mortgage-backed securities resulted in large losses and ultimately a run on the bank’s deposits that caused Federal Deposit Insurance to take over society. Roku said in a regulatory filing on Friday that it holds $487 million of its funds at Silicon Valley Bank. According to the streaming company’s balance sheet as of Dec. 31, 2022, Roku had $1.96 billion in cash spread across multiple accounts … and 26% of the company’s cash was invested with Silicon Valley Bank. However, this problem may already be solved and investors have no reason to panic.
The Fed stepped in over the weekend, reassuring Silicon Valley bank depositors that they will have full access to their deposits on Monday, protecting Roku’s cash and possibly avoiding a broader deterioration in the financial system. The Fed has also specifically stated that it will protect insured and uninsured deposits, which will likely take the pressure off the start-up sector as well as Roku. The Fed’s intervention is intended only to protect depositors, not Silicon Valley Financial Group shareholders or bondholders, so the SVB saga shouldn’t hurt Roku’s growth prospects or ability to pay its expenses.
Focus on Roku’s streaming platform growth and Adjusted EBITDA profitability
While the SVB saga was a distraction last week, I think investors shouldn’t panic and focus on Roku’s long-term value in the streaming market. A key benefit for Roku is that long-term streaming trends are clearly in the company’s favor. Earlier this month it was reported that the big legacy pay-TV providers have been losing subscribers over the past year. Traditional pay-TV providers lost 5.8 million subscribers in fiscal 2023, up 1.1 million from fiscal 2022. I’ve already pointed out that the cable-cutting trend is a big boost for streaming companies like Roku.
Roku is clearly benefiting from the rise of streaming TV and continues to attract a large number of subscribers to its platform. As of the end of fiscal 2022, the streaming company had 70 million subscribers in its ecosystem, a 16% year-over-year growth. Based on current account growth rates, I believe Roku could break 100 million subscribers in fiscal 2025.
Source: Roku
Despite a slowdown in Roku’s post-pandemic revenue growth and a deteriorating macro picture due to SVB’s closure, investors should focus on the company’s ability to steer its business toward profitability over the next year. The company has said it will post profitable EBITDA in fiscal 2024, which could reignite interest in the streaming company over time.
Revenue growth has slowed, but it’s not just for Roku. Netflix (NFLX) has also seen its revenue growth rate slow in the wake of the pandemic. Going forward, new partnerships with advertisers and increasing content distribution could be catalysts for Roku to reignite its revenue growth.
Data from YCharts
While Roku still has a long way to go to turn the tide in terms of its profitability, the shares could see a strong re-rating to the upside if the company hits its profitability target in fiscal 2024.
Roku’s valuation is attractive anyway
Roku’s valuation has become more attractive since the company reported Q4’22 earnings, in part due to concerns about the company’s cash held by SVB. Since the Fed intervened over the weekend, I think investors no longer need to worry about Roku’s ability to run its business normally.
However, if Roku’s shares continue to sell off, investors should perhaps see it as a buying opportunity rather than an opportunity to dump shares. Roku is selling for an expected price-to-sales multiple of 2.2X, compared to Netflix’s price-to-earnings ratio of 3.4X. Roku is also now selling 28% below its 1-year moving average P/E.
Data from YCharts
Risks with Roku
Streaming trends and rising streaming TV penetration are key positives benefiting Roku, but there are still significant risks. One risk is that revenue growth is slowing and that Roku’s key average revenue per user showed signs of weakness in the fourth quarter. Weaker user monetization may delay Roku’s ability to turn a profit, which could weigh on the company’s valuation factor going forward. In addition, there is also a general risk that other financial institutions will collapse under pressure from deposit withdrawals, which could put downward pressure on the stock market and lead to a deterioration in the macroeconomic picture.
Final Thoughts
Roku’s shares have been consolidating following Q4’22 earnings, and near-term there may be more valuation pressures and volatility that investors may want to take advantage of. I believe Roku’s streaming business is on the right track as its active accounts are still growing. Achieving FY2024 EBITDA profitability could be a milestone that investors may reward with a higher valuation multiple factor. While not cheap, I believe the risk profile is positive. With the Fed also stepping in over the weekend and guaranteeing Roku’s deposits at Silicon Valley Bank, I believe investors should see a market slide as an opportunity to buy Roku stock!