Roku, Inc. Class A Common Stock

**Introduction**

$ROKU is the leading TV streaming platform in the United States, Mexico, and Canada by hours streamed. They have pioneered streaming to the TV and believe that all TV content and all TV advertising will be streamed.

**Strategy**

$ROKU mission is to be the global TV streaming platform that connects and benefits the entire TV ecosystem of consumers, content publishers, and advertisers. Through their TV streaming platform, they connect consumers to the entertainment they love, enable content publishers to build, engage, and monetize large audiences, and provide advertisers with unique capabilities to reach consumers.


![Image upload](https://cdn.commonstock.com/40086ccf703103bee4f2d72248c76ef489cf6ec26b03e6eef2231502d0e7f8a7-706x498.png?auto=format&w=748)

**Roku Business Model**

**Hardware sales**
Roku sells and markets players, smart TVs, and audio solutions. The company is well-known for its Roku streaming devices. Usually, these devices are available in retail stores and electronic shops. The company sells these products at different products and specifications. Usually, these devices are cheap and come at costs lower than $100.

**Advertising**
Roku also makes money through
advertising. The company also has its independent channel. Through this
channel, the company shows advertising between content and when paused. The
company deals with various licensing partners who can display their ads through
this feature. The company does not have to share its advertising revenue due to
its IP.

**Licensing**
Roku sells smart TVs, which come bundled with its operating system. However, it also licenses its OS to other smart TV manufacturers. This sale occurs through a license. The company makes
money from each partner using its operating system. Currently, Roku provides these services to over 15 brands. The company also makes money for each unit sold with its operating system.

**Subscriptions**
Roku also has a subscription-on-demand (SVOD) platform. Through this platform, users can purchase subscriptions to other streaming services. In exchange, Roku withholds a percentage of the fees paid by users to the streaming service. However, users do not have to pay this
amount. Instead, the charge occurs to the partner. The company does not disclose how much it charges those partners.

**Branded content**
Roku also makes money through branded content. In 2021, the company launched its Roku Brand Studio. Through this studio, the company produces branded content for advertising partners. The
company receives money from the partners in exchange. Usually, this money comes on a fixed or contractual basis. Roku does not disclose how much money it makes through branded content.


![Image upload](https://cdn.commonstock.com/5d275f07e521bd8e433b364a0877876d1634a044966e3895f75e4c5018a348dd-915x638.png?auto=format&w=748)

**Market Cap and Revenues**

As we can see, Roku Inc. is almost at half of the Market cap levels of 2019, due to high inflation rates and the fear of an economic recession. Furthermore, looking at the diagram below, Roku revenues come to approximately, 56% from advertising, 23% from Content Distribution (in the form of Entertainment), 8% from Software Licensing (Roku OS), and 13% as a Retailer of streaming devices (Player/Special line).

![Image upload](https://cdn.commonstock.com/c4054880daef4020733d0e4ac50498a331b20f45916df9182ff1e2af2500b836-776x495.png?auto=format&w=748)


![Image upload](https://cdn.commonstock.com/46a3a955cf24b72fdf21f52f4e8b0128e431b1e0d9ee512004417549d59b3824-917x443.png?auto=format&w=748)


**Survey the Landscape**

The first step in valuation is to investigate the following:
1. The market sector that Roku Inc operates in and how much growth this sector will have in the future.
2. Competition from the companies who operate in the sector.
3. How much is the market share of Roku in this market?
4. What products does Roku offer to its customers? and
5. How exactly the macro environment, which operates, will affect the operations?

$ROKU operates in TV streaming through Over-the-top (OTT) media. OTT media generally refers to media platforms that use the internet to provide users with content rather than traditional services like cable and satellite.  Their devices are essential within the OTT market as they assist in making these services accessible to people within their homes. Below you can see the growth of Over-the-top (OTT) TV and video revenue worldwide from 2022 to 2028.


![Image upload](https://cdn.commonstock.com/cec675e6de040ff2f92e6c84c3b3bb669f7132af01bbdd7668201c488d04541b-915x631.png?auto=format&w=748)

Roku mainly creates revenues from advertising-based video-on-demand (AVOD), subscription video-on-demand (SVOD), and Pay-per-View (TVOD) services. Looking at the above diagram and the open source for TVOD, we can estimate the whole AVOD, SVOD, and TVOD market in 2028 which is 229.66 billion dollars. Furthermore, looking at open-source information, I found the market share of Smart TV streaming device market share worldwide (as of 2020), by platform:

![Image upload](https://cdn.commonstock.com/8725537f238fe42bd6756ea215a6c41753a4de7720c0bd09631f660b44a245cb-915x562.png?auto=format&w=748)
As we can see from the above diagram, the competition is very high because Roku has to compete with Sony, Amazon Fire, Android TV, Google Cast, and Apple tvOS.
If we assume that Roku will maintain its advantage over the competitors and the market share remains stable, then we can estimate the market value (in revenues) for Roku which is **14.7 billion in 2028.**

**Roku Narrative**

$ROKU is a high-growth company that is seeking ways to become profitable. Looking at the last Annual 10K in the section “Strategy” we can find the following:  "Roku Inc.'s mission is to be the global TV streaming platform that connects and benefits the entire TV ecosystem of consumers, content publishers, and advertisers.”.
Thinking of the business model of the company and the above statement, I derive the following results:
1. Leading company in the US with a market share worldwide equal to 6.5% of the OTT media market.
2. Global TV streaming platform means that they will operate worldwide.
3. High revenues and profitability (from negative to positive margins) mean a **high reinvestment** **rate** .
4. **What** **I believe about $ROKU:** 50% as an Advertising company, 40% Content

    Distribution company (Entertainment), and 10% Retailing (Special line) company.


![Image upload](https://cdn.commonstock.com/2d931122e0bba7b8f638a08d36287b479a62f60ef0d413358a91e2bf155a4b7c-917x618.png?auto=format&w=748)

**Roku Narrative: Possible, Plausible, and Probable**
![Image upload](https://cdn.commonstock.com/a2113a3d3df6629966777c9990c57b8eee42a032bf55c018b42bc0b89ceb7c32-462x789.png?auto=format&w=748)

**Valuation of Roku**


![Image upload](https://cdn.commonstock.com/eb88a46354a8988c0d33872e97fa41007a6a538c9ed991c1421dfc35a22f8855-915x750.png?auto=format&w=748)
**Value as of Jul 07, 2023**

Terminal cash flow $970,474.63
Terminal cost of capital 7.62%
Terminal value $26,808,691.47
PV(Terminal value) $9,530,225.42
PV (CF over next 10 years) $3,462,111.08
Value of Operating Assets = $12,992,336.49
Probability of failure = 15.00%
Proceeds if firm fails = $9,094,635.545
Value of operating assets = $12,407,681.35
-Debt $80,000.000
-Minority interests $-
 + Cash $ 1,630,052.000
 + Non-operating assets $-
Value of equity
 $13,957,733.351
-Value of options $92,948.00
Value of equity in common stock $13,864,785.351
Number of shares 137,005.00
Estimated value /share $101.20
Price  $63.00
Price as % of the value 62.25%
Under/Over Value 37.75%


**Conclusion**


A good valuation stands between the numbers and narratives. I tried to make estimations in fundamental factors, looking at the history of the company and then I adjusted them to reflect the high competition and the macroeconomic effects. I believe that the main advantage of Roku is that leads the way in the US in the TV streaming sector, which is in high growth (advertising and subscription services (AVOD/SVOD). Due to the high growth of the sector, it is avoidable the high competition from Amazon, LG, Google, and Apple. As a result, the company should have a high reinvestment rate to keep its competitive advantage as a leading company in the US. Furthermore, looking at the narrative of the company and the worldwide market share, I believe that will become profitable in 2025 but only with high growth in revenues (30%). As a result, for my taste, Roku Inc. is undervalued by about 37% and I will pay the price of the market offers. I hope all of you have good investments and thank you for supporting my work.

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Hi ! Interesting analysis. A couple of questions:
1) what growth rate have you used to calculate the terminal value 
2) what return rate did you use for determine the PV of that TV
3) why did you choose FCFF over FCFE or DCF? 

Nacho

Yeah.. I was not asking about perpetuity revenue growth rate, but a sustainable growth rate for the entire company. Also considering Risk free you are automatically assuming this level of inflation through perpetuity. The discount rate on the other side should consider market risk premium, beta and risk free usually, how could you calculate it through sectors average ? Each asset has to have a different discount rate since all of them have intrinsic risks associated with their own business model/operation. I struggle to find one single reason that shows me a healthy company tbh. Also FCFF and FCFE valuations are insanely different one from another 2 and 3 stages indifferently 

Great memo! I have two follow up questions :) 

What makes $ROKU’s hardware unique?

Also I wondered which segment of ROKU’s business currently brings in the most revenue? 


Joey Hirendernath

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Valuation Report of Roku Inc. – TV Leading Streaming Platform

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