That went well. Streaming media player maker Roku (NASDAQ: ROKU) officially priced its initial public offering on Wednesday night at $14, the high end of the expected range listed in its amended S-1. Shares closed yesterday at $23.50, posting gains of 68% on the first day of trading, and are up another 19% today to around $28 as of 1:00 p.m. EDT. The stock even flirted with $30 in early trading.
After doubling in less than two days, how does Roku's valuation look?
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Roku now has 94.75 million shares outstanding following the IPO, although this figure could rise by as much as 2.35 million shares if underwriters exercise all of their options, depending on investor demand. At the $14 offering price, that values Roku at approximately $1.3 billion. With the stock skyrocketing, Roku's market cap is now between $2.6 billion and $2.7 billion.
Save for one quarter (Q4 2016) over the past couple of years, the company is not profitable. Roku has posted a net loss of $33.7 million on a trailing-12-month (TTM) basis, so it doesn't have a P/E to speak of. In these cases, the next best valuation metric to look at is the price-to-sales ratio, which sits at about 6.1 based on TTM revenue of $436.1 million. That doesn't seem terribly expensive, although keep in mind that ratio has doubled since yesterday morning.
Unfortunately, there aren't many directly comparable companies to measure that valuation against. Most of Roku's rivals are much larger companies with more diversified businesses compared to Roku's hardware and platform business. What we can say is that hardware companies generally fetch lower multiples, while software/services companies can usually justify higher multiples since they often enjoy higher margins. Roku is a bit of both; hardware comprises about two-thirds of revenue, with platform revenue pitching in the remaining third. The margin profiles of each business are about what you'd expect, too: Player gross margin is 13%, while platform gross margin is 75%.
The platform business
The company has undoubtedly been making progress in growing its profitable platform business, which helps justify a higher valuation.
Active accounts and average revenue per user (ARPU) are also heading in the right direction. The company now has 15.1 million active accounts that have generated TTM ARPU of $11.22.
However, I have some concerns regarding the platform. First of all, a significant amount of usage is generated on Netflix and YouTube, where Roku collects almost nothing (Roku earns exactly $0 from YouTube usage). Furthermore, the majority of platform revenue is derived from advertising (63% in fiscal 2016 and 67% in the first half of 2017). In other words, the platform business is less about sharing subscription revenue than you might think, and more about sharing video ad inventory from free, ad-supported channels -- and there could be more promising advertising businesses out there to invest in.
For now, Roku shares will likely remain rather volatile, like most freshly public companies. Whether or not you think Roku's $2.6 billion valuation is warranted right now largely depends on if you think the company can execute as an advertising business in the long term, and I'm not so sure that it can.
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