Roku trades at $88.05 and has moved in lockstep with the market. Its shares have returned 6.1% over the last six months while the S&P 500 has gained 5.3%.
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Why Is Roku Not Exciting?
We're sitting this one out for now. Here are three reasons why we avoid ROKU and a stock we'd rather own.
1. Customer Spending Decreases, Engagement Falling?
Average revenue per user (ARPU) is a critical metric to track because it measures how much the average user spends. ARPU is also a key indicator of how valuable its users are (and can be over time).
Roku’s ARPU fell over the last two years, averaging 1.4% annual declines. This isn’t great, but the increase in total hours streamed is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if Roku tries boosting ARPU by taking a more aggressive approach to monetization, it’s unclear whether users can continue growing at the current pace. 
2. Shrinking EBITDA Margin
Operating income is often evaluated to assess a company’s underlying profitability. In a similar vein, EBITDA is used to analyze consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a clearer view of the business’s profit potential.
Analyzing the trend in its profitability, Roku’s EBITDA margin decreased by 7.1 percentage points over the last few years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its EBITDA margin for the trailing 12 months was 6.5%.
3. EPS Trending Down
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Roku, its EPS declined by 36.7% annually over the last three years while its revenue grew by 13.3%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Roku isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 35.3× forward EV/EBITDA (or $88.05 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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