In this article I am going to calculate the intrinsic value of Roku Inc (NASDAQ:ROKU) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in March 2018 so be sure check the latest calculation for Roku here.

Is ROKU fairly valued?

I use what is known as the 2-stage model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin, I took the analyst consensus forecast of ROKU’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.86%. This resulted in a present value of 5-year cash flow of US$429.44M. Want to understand how I calculated this value? Read our detailed analysis here.

The graph above shows how ROKU’s top and bottom lines are expected to move going forward, which should give you an idea of ROKU’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is US$2.58B.

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$3.01B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $30.25, which, compared to the current share price of $36.93, we find that Roku is fair value, maybe slightly overvalued and not available at a discount at this time.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For ROKU, I’ve put together three important aspects you should further research:

1. Financial Health: Does ROKU have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

2. Future Earnings: How does ROKU’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ROKU? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.