Roku (ROKU) is yet another stock with a sky-high valuation, that is not expected to turn a profit until 2022, and trades with an EV to EBITDA ratio of over 100. The company which produces no content of its own and generates the majority of platform revenue from advertising is more expensive than Netflix (NFLX).

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Valuation Insanity

The stock’s valuation has run-up to a market cap of nearly $35.3 billion and leaves the shares trading for around 11 times 2022 sales estimates. That is nearly double the price to sales ratio for Netflix, which trades for 6.2. For some reason, investors are willing to pay a higher multiple for Roku than Netflix, despite Netflix having a recurring revenue stream from subscription service and pricing power.

Roku has none of those benefits while generating about a 1/3 of its sales from selling lower margin streaming player devices, and the other 2/3 from its mostly advertising platform business. Typically, the business model that Netflix employees garners the higher multiple because future revenue stream and growth is more predictable. Even traditional SaaS or subscription model businesses such as Salesforce (CRM) trade for less than Roku on a price to sales basis – Salesforce, currently, trades at 7.8 times 2022 sales.

When digging deeper into Roku’s valuation, one will see how the stock trades for 126.50 times EV/EBITDA in 2022 and 1,674 times 2022 earnings estimates. On a price-to-cash-flow basis, the multiple is at 197.8 times 2022 estimates.

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These really are mind-bending valuations for Roku. It is hard to imagine how much growth the company would need to make these valuations make sense. To bring Roku’s valuation to be on par with Netflix, Roku would need to generate almost double the analysts’ current revenue estimates of nearly $3.2 billion. With $5.7 billion in revenue in 2022, the stock would trade for 6.2 times sales estimates – the same as Netflix. That is nearly 80% higher than current analysts’ estimates.

That is a massive hurdle for any company to climb over the next 2 years; it means there is zero room for Roku to miss or meet estimates along the way. It will need to beat estimates and raise guidance every time it reports results over the next 8 quarters to achieve the market’s valuation.

Weakening Trends

Roku’s chart is fairly bearish, with divergence between the relative strength index and the price suggesting a reversal is in the works. Additionally, the stock is rising on less volume, and that it’s a sign that buyers are thinning, while the falling RSI suggests momentum is leaving.

The stock has a level of resistance at the trend line around $255; if that breaks, the stock likely falls to $240, dropping about 13%. The declines could grow much worse than that, depending on if a broader market drop accompanies a sell-off.

Overall, the stock carries a tremendous amount of risks, and the shares have received a big boost from the stay at home trade. Eventually, that trade will end, and when it does, it is likely not to be a pretty ending for this stock.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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