Roku's Stock Is Dead Money

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Roku (NASDAQ:ROKU) is rising after it reported results on April 28. The stock has been dead money since reporting fourth quarter results, and it looks pretty probable the equity remains dead money for the foreseeable future. The earnings were satisfactory, basically coming in line with expectations. Earnings missed expectations by around 5.5%, while revenue was 1.7% better than expected. Additionally, monthly active users were in line with analysts’ estimates, while EBITDA was better than expected by almost 4%.

The guidance was weaker than expected. The company guided second quarter revenue to around $805 million and EBITDA to breakeven. Analysts were looking for revenue of approximately $825 million and EBITDA of about $100 million.

EBITDA Matters Most

Roku is a stock that trades mainly on trends in EBITDA, and that disappointing guidance should weigh on the shares. EBITDA has witnessed a deceleration and is now falling on a sequential basis. Based on the declining EBITDA, it seems unlikely this stock will see any meaningful rebound in the future.

Bloomberg

Additionally, analysts estimate that EBITDA will fall by almost 67% in 2022 to $154 million. Considering that the company sees a breakeven second quarter for EBITDA, it would suggest that any recovery in EBITDA doesn’t happen until the second half of 2022. Analysts expect EBITDA to rise in 2023 to around $323.8 million and $531 million in 2024. But remember, this company saw a total EBITDA of $465.25 million in 2021, so this will be a very long road to recovery, which means it will be a very long road for recovery in Roku’s share price.

It may not even matter what the EV/EBITDA multiples were before the stock’s big meltdown because we are clearly in a period of multiple compression on the macro stage. It seems doubtful that those multiples of the past for Roku will be seen anytime soon.

Bloomberg

What looks pretty likely to me is that the EV/EBITDA multiple compresses further and returns towards the lower end of the range, around 31 times 2022 EBITDA estimates, which is about half of the current EV/EBITDA ratio is currently at 71.

Weak Trends

The overall trends in the company do not make me optimistic about the stock. There’s an evident slowdown in much of its business, with monthly active users seeing a year-over-year growth rate of just 14.3% in the first quarter. It was the slowest reported growth rate in this metric to this point.

Bloomberg

Additionally, average revenue per user growth is also slowing, rising by 33.5% year over year to $42.91.The growth for both of these metrics has been very steady, and while slowing growth is not the same as declining, it tells us that the company is maturing and that future growth rates aren’t likely to be as supportive of the high multiples the stock saw in the past.

Bloomberg

These two metrics support the idea that stock is likely to see further multiple compression. Therefore, where the stock goes from here will rely more and more on the company’s ability to return growing EBITDA, and any slip-up, or worse, decline, for active accounts or ARPU would be devastating.

Weak Technicals

The chart shows the stock is hitting challenging levels of resistance around $98, and that level may be tough to break, with two very clear downtrends in the shares currently. A failure to push above the $100 mark may lead to a decline in the equity to a range of $75 to $80.

On the positive side, there’s evidence of bullish divergence forming with the relative strength index rising while the stock price is falling. If the stock can push beyond the $100 region, it has a chance to increase over the short term to between $115 and $120. However, I think this bullish case is less likely.

TradingView

On the positive side, the company has a large and stable account base that Roku could work with to find new ways to monetize down the road, which is essential. But at this point, Roku is just a troubling story that saw massive growth pulled forward due to the pandemic and is now clearly on the slowing side of that story.

Growing from here will be more complex and more challenging, which isn’t suitable for this stock and is probably why its glory days are well behind it and not likely to be seen again for a long time.