I began looking into ROKU a bit further and wanted to comment on a few things.
First, I think it is best to look at ROKU without the player segment and assume that business is pass through and, therefore, eliminate it from the equation. Yes, that business has posted positive margins, but without it, the comparison to other software/platform companies becomes a bit more appropriate.
Also, ROKU doesn’t seem to post non-GAAP expenses, but only GAAP. So, I added back in SBC to the GAAP numbers in order to get to an Operating Margin.
Based on platform revenues only. Starting at the top is Q2 2018 through Q2 2019 at the bottom.
GM R&D S&M G&A SBC OpM 69.8% 44.5% 24.7% 17.1% 5.9% -10.6% 70.5% 45.4% 25.6% 19.8% 6.6% -13.6% 72.2% 33.7% 22.9% 14.0% 5.9% 7.6% 69.9% 41.5% 25.2% 16.5% 8.7% -4.6% 65.4% 37.0% 21.8% 15.5% 7.5% -1.4%
And the valuation as of today is a P/S of 29.6x (EV/S of 28.9x) based on platform only.
As we know, platform grew 86% this quarter. Additionally, we see leverage happening in the business as all costs have come down as a percent of platform sales over time.
I just began diving into and thinking about ROKU and from a stock appreciation perspective, I’m late to the party and have mixed views. I like seeing some leverage in the model. I like the growth rate. Gross margins dropping 4% is a concern. The valuation is in the upper tier of companies we follow especially compared to the gross margin.
While I question their competitive advantage, I also see the importance of being neutral. They are the only streaming platform seems to connect with all others and provide a single place to do so. This could be powerful if they can keep it up. I don’t profess to know the risks involved with that.
I’d be interested to see if other’s have any thoughts on the above.
I thought this post may at least provide ROKU in a different light by ignoring the player component even if it doesn’t start much conversation.