Today we have a very speculative idea: take shares of streaming service provider Roku (NASDAQ: YEAR), in order to make money on their rebound.
Growth potential and validity: 25% behind 18 Months; 57% behind 3,5 of the year; 116% behind 7 years.
Why stocks can go up: they fell hard, but there is reason to expect their rebound.
How do we act: we take shares now by 221,92 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
About that, how the Roku business works, written in a previous investment idea and a recent analysis of the company's business. We will only repeat the main thing here..
The company sells players for streaming, which gives her about ⅓ of the revenue, and on the platform for these players earns from the provision of various services such as advertising and selling other people's content to users, this gives her the other ⅔ of the proceeds.
The segment of the players themselves is extremely low-margin and periodically rolls into losses. But the service segment is distinguished by extremely high margins: gross margin is bigger here 60% from segment revenue.
Arguments in favor of the company
Fell down. This July, the company's shares fell from an all-time high of 479.5 to 221,29 $ under the weight of the company's price, and besides, the company gave a forecast worse than analysts' expectations. This gives us the opportunity to take Roku shares in the expectation of a rebound - since there is more than sufficient reason for such a rebound., despite analysts' expectations.
Got better. The company is now in significantly better financial shape than it was before., what happened a year ago: and revenue, and profits are at very high levels. And the company's shares are significantly cheaper, than a year ago, - they cost 324 $. Then P / S of the company was approximately 23,53, and now - 12,29. P / E was somewhere beyond the mark at the time 500, and now "only" 107.
Given the strong decline and objectively good business performance of the company, there are serious enough reasons to expect a rebound in shares.
Promising. Coronacrisis will not end soon - and, may be, will even be replaced by a pandemic of another disease, when the letters of the Greek alphabet for the coronavirus strains run out. Under these conditions, streaming will be the most promising line of work for content producers - as cinemas are already losing ground even in a relatively open economy and do not provide studios with sufficient fees..
Therefore, studios increase spending on the production of content for streaming.: Disney, for example, will spend an incredible $33 billion next year for these purposes. The rest of the studios are also not far behind and are increasing spending..
Under such conditions, Roku looks like a gold rush seller of shovels and will capitalize on the growth of streaming services spending on promotion on the Roku platform.. And that's, that such expenses will grow, I have almost no doubt: marketing budget now makes sense to reallocate away from offline events and traditional media in favor of online advertising and streaming.
Well, it's actually to be expected., that users will spend more and more time at home and increase spending on content on the Roku platform - an eternal pandemic will play into the hands of the company.
Can buy. The company has a lot of big competitors with deep pockets like Sony, Microsoft and others like them. They may well fork out to buy Roku, which is now worth $ 29.82 billion.
What can get in the way
Concentration. According to the company's annual report, some unknown client gives her 11% proceeds. Revisiting relationship with this customer could negatively impact Roku reporting.
Counting fees. I talked about the complexities of creating cinematic content on the example of the Black Widow incident., the success of The Squid Game and the box office success of recent blockbusters. The essence is something like this: streaming services would love to save on production, but they don't do it very well., therefore, they are motivated to save as much as possible on that, on what they can.
For example, they can squabble with Roku about the pricing and terms of placement on its platform, wanting to get the most for their money. Roku recently nearly lost YouTube due to such disputes with Google, but the dispute was settled.
Competition. Some streaming companies have their own set-top boxes, for example in Apple and Amazon, therefore they are motivated to transfer users to their own hardware. This may negatively affect Roku: if these companies decide, that it would be more profitable for them to refuse Roku services, or if they start to pressure Roku or leave its platform altogether, which will be a very difficult test for her, because now they are her clients. Furthermore, such players may try to produce other streaming services - this will further complicate the situation for the company.
Price. Anyway, and Roku is expensive, and therefore its quotes will be very volatile. This price creates unrealistic expectations among investors, and if the company won't fit into them, for example, the number of active users will be slightly less, than planned, then the stock will "storm".
Logistics. No matter how unprofitable the segment of its players is for the company, they need to be sold to expand the audience. It was logistical problems that spoiled the sales of the company's players in the past quarter.: this indicator turned out to be worse by 26% compared to the same quarter 2020. Considering, that the semiconductor crisis is in full swing, can be mentally prepared, that the player segment will spoil Roku's reporting.
Ambitions. Roku may continue to invest in creating its own content: she previously bought the content catalog of bankrupt streaming service Quibi for $100 million..
Basically, there is nothing wrong with creating your own movie library: it attracts users. But full-fledged production of its own content will require huge investments - and here Roku will have to compete with giants like Disney., whose financial resources will be clearly larger, than Roku.
So let's hope, that Roku will not be aggressive on the film production front and will focus on developing the advertising and other services segment.
What's the bottom line?
We take shares now by 221,92 $. Then there are three options:
- conservative. Wait for the stock to rise until 279 $. Think, we will reach this level in the next 18 Months;
- optimistic. Wait for growth until 350 $. It is better to count on 3,5 of the year;
- impudent. Wait for stocks to return to their all-time highs 479,5 $. Here you should prepare to wait about 7 years.
But anyway, keep in mind, that this idea is very volatile.
