Roku stock has been a multi-bagger for investors since it came public in 2017. However,
this former high flyer is down more than 80% from its 52-week high so is this a busted company or
is this just a busted stock? here's why we think it's the latter and we believe that right now is
a great time for investors to buy a few shares my name is Brian Feroldi and my name is brian Stoffel
thanks to commonstock for supporting today's video as of the time it's recording i am a
shareholder of roku and i am not so brian despite being down over 80% roku is still a $12.8 billion
dollar company today roku's mission statement is to be the tv streaming platform that connects the
entire tv ecosystem around the world this isn't our favorite mission statement ever but i do
believe this company's on a mission so how does it expect to accomplish that mission well roku
has a platform that allows anyone to stream any of their services through their main page roku sells
dongles and also works with tv manufacturers to use its operating system and for everyday users
like you and i we can simply turn on our tv and access our favorite streaming services through
roku's platform consumers have been shifting away from linear tv for more than a decade and 2022 is
an inflection point for the industry where more consumers can be reached on streaming platforms
than they can on linear tv we think this is a trend that's only going to accelerate and benefit
streaming companies such as roku moving forward so how does roku make money well it has two primary
sources the first it calls player revenue that's revenue from the sales of its dongles or through
its agreements with its tv manufacturers we're not too concerned about that revenue stream the
one that we're more interested in is platform revenue roku makes money when viewers watch
ad supported tv roku gets to keep a slice of each ad that's placed on its platform but that's not
the only way it makes money if you as a user sign up for a new streaming service like say
disney plus through roku's platform roku will get a recurring slice of that subscription
or if you and your family decide to purchase a tv show or a movie on something like amazon
prime roku will keep a slice of that as well one important way that roku signs up new users is for
the sale of smart tvs by other manufacturers roku software is the default operating system for many
of them and that naturally converts them into users for that reason this company doesn't have
to spend a lot of its gross profit on sales and marketing which is very attractive when it comes
to customer demand we need to look at the from two sides the first is the experience of the user
users are pretty much recession proof people are going to watch streaming devices no matter the
economic conditions the other part is advertisers advertisers will ebb and flow depending on the
economic circumstances so we give this company a robust rating thankfully the majority of this
company revenue comes from the platform business so we think the vast majority of this company's
revenue is recurring in nature now if we had to pick out just two metrics to watch with roku these
would be them the first are the number of active accounts and you can see that this has grown
at a roughly 33 percent clip over the last five years and today roku has over 60 million active
accounts even more exciting for investors is that average revenue per user has grown at a 31 percent
rate over the last five years and recently clocked in at over 41. now when we turned to the company's
mo brian and i actually had a long discussion about this first one the network effect i was
arguing that i think it's actually quite strong the more users roku has on its platform the more
that streaming services that are just getting off the ground are incentivized to use roku to get
their content out there i think that's a pretty strong network effect i believe it's there as
well i just don't think that it's strong i would classify it as medium weak so we settled on a
medium score however we both agree that roku has some strong switching costs to it once you install
a smart tv or set up a dongle on your account you have no incentive to switch away to anything else
that makes it switching costs relatively strong when it comes to low-cost production it is worth
mentioning that roku has an advantage here and that is in the form of data over the past few
years there have been over 100 billion hours of streaming tv watched on roku's platform and
that data is very valuable in placing ads we also think it's a strong argument to be made that the
name roku has strong brand affinity with consumers which gives the company yet another source of moat
and perhaps the most important and sneaky mode that this company has is counter positioning
that's because its primary competitors are behemoths like apple alphabets google and amazon
what does roku have that these three don't it is agnostic it doesn't have its own service that it's
going to prioritize over the others giving it an edge on the competition when you combine all these
sources together we think that roku has built itself an impressive moat and moreover given the
number of accounts that are growing we think that this company's moat continues to widen next let's
turn to financial results when we look at revenue growth it has been very strong growing at a 49
clip over the last few years gross margins over the past 12 months have come in just below 50
which isn't super strong but we need to remember that the player side of the business has very low
gross margins and net income is positive though the company is not terribly focused on it one
thing that investors should pull out is that the company has been producing positive free cash flow
for each of the last three years and its balance sheet is absolutely pristine given its lack of
focus on profits this company's returns on capital are currently negative or in the best case very
low turning to management this is a company that has something that we love which is a founder-led
ceo anthony wood started this company many years ago and is still on board running the ship wood
gets really good reviews from employees on glassdoor and insiders of this business own
more than 13 of shares outstanding that's worth nearly 2 billion at current prices now turning
to optionality this company's evolution of its business model has been impressive and it shows
inherent optionality moving from simple dongles to creating an entire platform that places ads and
helps get subscriptions it's been rolling out new products and services for advertisers that have
been gobbled up by the market and we believe that the future will be the same roku offers a lot of
potential with operating leverage too the company has been focused exclusively on growing accounts
in the top line over the last couple years moving forward the focus is going to become optimizing
margins and profitability that should allow this company to grow its profits at a much faster rate
than revenue moving forward and the future does look bright the addressable market for placing ads
on streaming tv is growing at over 20 clip right now it's currently at about 73 billion dollars
and almost all of the company's growth is organic in nature so how is roku done for investors so far
the answer there is pretty good if you bought this company at its ipo you're currently up about 300
and it also has established a track record of outperforming wall street's estimates although
it did miss once in the last four quarters and unsurprisingly it is not focused on returning
cash to shareholders through buybacks or dividends positively it doesn't have any debt to pay down so
what risks should investors keep in mind first and foremost is competition roku is squaring off
against some of the biggest and most established companies on earth such as apple google amazon and
more the company has done a great job of fending off the competition given its neutral position
so far but this is a risk that investors should take very seriously if you buy shares another
thing that you need to know is that you'll likely be diluted over the past five years the number of
shares outstanding has increased by 43 that will probably continue hopefully at a slower rate but
it's something you need to be aware of aside from that even though shares have fallen more than 80
percent from their 52-week high we have a hard time calling this stock cheap today we'll cover
more about the recent valuation in just a bit but let's turn to a second to how the company did when
it reported the first quarter earnings revenue came in at 734 million dollars that was up 28
per year and it also pretty handily beat both wall street and management's expectations the company
reported an adjusted loss on the bottom line of 19 cents per share that was two cents better than
wall street was expecting for the first quarter and on a gaap basis gross margins were pretty
stable at just below 50 while operating and net margins were both negative thankfully it
was another quarter of the company producing positive free cash flow even though its net
income was negative the reason there is because of stock-based compensation and the balance sheet
remains in absolutely impeccable shape given those positive results why have shares been
under pressure well there's a couple of tidbits in the company's conference call that we need to note
first of all there are supply chain disruptions that is increasing the price for tvs in the
united states remember roku will integrate its operating systems in many tvs so the lack of
chips and the higher prices is holding back new users from joining the platform another warrior
for wall street is the general macro environment the company called out that inflationary pressures
geopolitical conflict and supply chain disruptions are currently hampering the company's top line
growth rate when you combine that with the high valuation and the general decline in growth stocks
it makes sense why roku stock has been in the toilet so what about the current second quarter
of 2022 well management believes that revenue will come in at about 805 million dollars that's just
shy of what wall street was expecting and represents 25 growth management doesn't offer
bottom line guidance but for what it's worth wall street is currently expecting a loss of 68 cents
per share which should be a reversal from the profit it reported in the year ago period if
we zoom out and look at full year guidance the picture gets better management is expecting 35
revenue growth year over year which is right in line with what wall street's hoping for
management doesn't provide bottom line guidance for the full year either however wall street is
currently bracing itself for a year of losses so what are investors like ourselves going to watch
moving forward well first average revenue per user the more it can melt out of each existing
user is a big deal to the company's top and bottom lines second we want to see total number of users
on the platform continue to grow this has been a headwind in a recent quarter but we want to see
this re-accelerate as the supply chain issues continue to ease third keep an eye on margins
inflationary pressures are bringing margins down on the player side of the business but we want
to see this abate over time fourth keep an eye on free cash flow we want to see that roku continues
to generate and compound its free cash flows over time now when you add all these forces together
we can't help but say that the moats surrounding roku's business is widening and while the growth
rates aren't as strong as they used to be we can't help but believe that the thesis for owning this
stock is fully on track so how did roku score when we recently ran it through our investing checklist
the answer there is pretty good on my investing score i got a 77 which is well into my investable
category and on my anti-fragile score got a score of an 11 and a half the company rewrote their
mission statement made it inspirational simple and optional it would be in the anti-fragile
category so why are we so interested in buying shares right now a big part of that is due to the
company's valuation collapse shares are currently trading for about 4.3 times sales which is the
lowest valuation in years it's hard to find other metrics to look at because the company is not
optimized for free cash flow or net income that being said its price to free cash flow ratio of 68
is also the lowest it's been in a very long time and while roku isn't optimized for bottom line
earnings we think that the p e ratio does have some value to investors 91 may seem high however
if this company's operating leverage kicks in that number could shrink in a hurry so there you
have it that's why we will be buying shares of roku for our real money portfolio that we are
running on common stock head on over to common stock and you can make a comment about what we
missed or what insights you have that we didn't cover we'll choose the most insightful comment
after a week and common stock will give $250 to that individual congratulations to stock
metal who won the top comment on our mercado libre video common stock sent stockmetal 250 in cash and
that could be you next so head on over to common stock make a comment on this and you could win 250
overall we think that roku is a high quality business that's trading at a
compelling valuation that's why we're happy to add it to our portfolio today brian's out