Roku Inc

Roku's second-quarter revenue rose 22% year over year, with advertising sales up 25% and subscription sales up 26%. Device sales, which carry negative margins, were flat, but a tariff refund led to a devices gross profit. Even excluding the refund benefit, adjusted EBITDA rose 180%, to $254 million.

Why it matters: Roku's shareholders are capped, but Fox appears to be getting a gem that is cementing itself as a key player in the modern-day television ecosystem. We expect Roku to be very helpful in Fox's evolution away from linear TV reliance. Most encouraging to us are Roku's premium subscriptions, which allow users to integrate disparate streaming services—including all major US streaming services other than those from Netflix, Disney, and Amazon—into the single Roku Channel app, offering users a much-demanded cohesive viewing experience in the fragmented streaming era. The success of the Roku app has led advertising and subscription revenue to accelerate from last year. Sales growth is bringing operating leverage that has led to a surge in profits and free cash flow, which was up 145%.

The bottom line: We maintain our $150 fair value estimate, which is based on near certainty that Fox closes its $160 per share acquisition of Roku, consisting of cash and stock, during the first half of 2027. Our stand-alone fair value estimate would go to $110 from $100, on a more robust margin expansion forecast. We would revisit our no-moat rating if Roku remained independent, as its subscriptions add switching cost characteristics that weren't present before the Roku Channel gained such traction.

Between the lines: We aren't currently concerned about a recent downward trend in device sales, which are a gateway to the Roku ecosystem. Roku-made device sales don't include Roku-labeled TVs manufactured by the firm's licensing partners, which make up the biggest portion of users. We also suspect memory prices are contributing to consumers slowing the pace of new purchases.

Our fair value estimate for Roku is $150, reflecting the takeout premium Roku is set to receive following its agreement to merge with Fox. Our stand-alone fair value estimate is now $110 and would imply an enterprise value/adjusted EBITDA multiple of 17 times our 2027 estimate.

On a stand-alone basis, we project sales growth will remain in double digits for the rest of the decade, before slightly moderating over the back half of our 10-year forecast, as the firm has less room to expand its user base. With opportunities for international expansion and ever more television viewing shifting to streaming, we expect viewership hours to average high-single-digit growth throughout our forecast. However, we also expect monetization to continue to improve, not only through better ad targeting but also through its role in driving streaming subscriptions and third-party viewing.

Our revenue growth estimate is driven mostly by the firm’s platform segment. We expect device revenue to average mid-single-digit growth throughout our forecast, but we expect device sales to continue losing money. All else equal, Roku would benefit from slower device growth, but we think it’s critical for the firm to continue focusing on devices to drive user growth in the Roku ecosystem. We project devices' gross margin to remain in the negative mid-teens throughout our forecast.

We expect margin expansion each year, primarily from greater operating leverage on sales and a mix shift toward platform revenue over devices. In all, we project the adjusted EBITDA margin to expand by more than a percentage point each year, on average, throughout our forecast, rising to 21% by 2035 from 9% in 2025. The margin expansion should largely flow to the bottom line and generate substantial free cash flow. We project $2.3 billion in free cash flow by 2035—a 18% free cash flow margin.

Roku’s capital spending needs are minimal, but we expect its content spending to continue rising. We project the firm will spend about 4% of platform revenue annually on creating and licensing programming for The Roku Channel.

We assign no moat rating to Roku. The company remains a leading provider of hardware for internet-connected televisions—whether through its own streaming devices and televisions or through the licensing of its name and operating system to television manufacturers. However, Roku faces competition from major tech companies and doesn’t provide a service that can be easily differentiated.

Amazon, Apple, and Alphabet all have ecosystems with many other services and devices that offer more paths to offset the losses that selling streaming devices often bring. In the past, Roku’s neutrality as a firm that did not provide both devices and a subscription streaming service was a helpful point of differentiation, but we think the streaming market has matured to the point where that is no longer the case. Major streaming platforms have become large enough that we don’t think any operating system would exclude a competitor’s offering. With consumers likely more attracted to streaming platforms than commodity-like device providers, such a move would essentially eliminate a given device provider as a viable choice for consumers. We expect the relationship to be similar to that between pay TV distributors and major networks that sometimes have carriage disputes. Ultimately, the sides see it as mutually beneficial to come together.

Roku offers access to a wide range of streaming choices, including subscription-based and advertising-supported video on demand as well as several free livestreaming channels, including the Roku Channel. In the platform segment, Roku primarily earns revenue by selling advertising space. Roku offers display ad placement on its homepage and screen saver, and it sells video ads on its Roku channel. Via its distribution agreements with content partners, Roku also secures some ad inventory to sell on third-party platforms and channels. In addition, Roku generates platform revenue by taking a cut when a user subscribes to a third party’s streaming service, and it sells space on the Roku remote control via a button that gives quick access to a streaming platform (for example, a Netflix button on the remote).

The Roku Channel has had success in attracting viewers, but Roku is not alone with this type of offering, and we doubt whether viewership will translate to profits. Tubi and Pluto, for example, provide much of the same live programming and reruns of older television shows and movies. Each is well behind YouTube in viewership, which provides video on demand and is the only free platform to account for more viewing hours. On its own streaming devices only, the Roku Channel may gain an advantage by being more prominently featured, but ultimately, to achieve the viewership the Roku Channel has attained, Roku has had to spend to create and license content.

Roku’s move to aggregate streaming services into its own app gives it a greater hook into consumers that brings enhanced revenue opportunities.

Roku’s huge user base attracts advertisers and allow the company to charge a premium for real estate on its home screen.

Roku can drive users to The Roku Channel by prominently featuring it, giving the channel an edge over other free, ad-supported streaming services like Pluto and Tubi.

Roku can only maintain its large user base by selling devices below cost, and this strategy has not yet moved it toward profitability.

The Roku Channel is undifferentiated from many other free streaming services, and content costs to supply the channel have widened financial losses. Unlike most competitors, Roku doesn’t have alternative profitable businesses that can help buffer a struggling streaming service.

The need for Roku streaming players will wane as more televisions are smart TVs, leaving Roku dependent on television manufacturers to reach consumers.