Subscriber-based businesses are under pressure as difficult comparisons and moderating growth rates led investors to dump their stocks. Take Roku (NASDAQ:ROKU), for instance. Its stock has declined by 58% in six months. Further, it has fallen about 28% this year.
Part of the problem has been the moderation in its active account growth rate on a quarter-over-quarter basis. Roku’s active accounts growth rate moderated from 11.3% in Q4 of 2020 to 2.4% in Q3 of 2021. Further, a resurgent virus, chip shortages, and supply challenges negatively impacted advertising spending, and in turn, Roku’s financial and operating performance.
Now What?
Roku is scheduled to announce its Q4 results after the markets close on February 17. While the difficult year-over-year comparisons could impact its financials, Jeffrey Rand of Deutsche Bank expects Roku’s Q4 earnings to act as a “positive catalyst for the stock.”
The analyst added, “Our checks indicate that the advertising market remained strong in 4Q despite some initial concerns about brands reducing advertising spending in the quarter on supply chain issues.”
Further, commenting on the recent correction in Roku’s stock price, Rand added, “We believe this pullback is overdone as Roku remains well-positioned and the market leader in the rapidly growing connected TV (CTV) market.”
Citing Roku’s low valuation, Rand stated that Roku’s valuation multiple of approximately 4 times expected CY23 EV/Sales is much lower than corporations growing their top line by more than 30%. Moreover, as the analyst expects Q4 earnings to be a positive catalyst for Roku stock, Rand recommends a Buy at current price levels.
However, the analyst remains concerned about Roku’s active account and overall platform revenue growth in the near term. Taking a conservative view for the short-term, Rand lowered his price target to $300 from $400.
Wall Street’s Take
The ongoing migration of audiences, advertising, and content towards the CTV platform could continue to benefit Roku’s financials. However, short-term headwinds are keeping analysts cautiously optimistic about Roku’s prospects.
Roku stock has a Moderate Buy consensus rating on TipRanks based on 12 Buy and 3 Sell recommendations.
Meanwhile, ROKU’s stock price forecast shows significant upside potential due to the recent pullback. The average Roku price target of $284 implies 72.2% upside potential to current levels.
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