Shares of video-streaming pure-play and maker of the popular media player Roku (NASDAQ: ROKU) have been under serious pressure in recent months.
The sell-off looks to be accelerating of late, with ROKU stock shedding around 16.7% over the past five days.
Roku’s last quarter isn’t sitting too well with investors. That said, broader market moves seem to be the leading cause for concern. High-growth is unloved right now.
As the sell-off continues, the higher the multiple, the more pain investors should expect.
For that reason, the stock could continue to be among the most vulnerable names amid the tech-focused sell-off. I wouldn’t look to catch a bottom in the stock at $193 and change per share. At the same time, I’m in no rush to head to the exits, as Roku stock is close to surrendering all of the gains posted in 2020. I am neutral on ROKU stock.
Roku Stock Falls Back to Earth
Currently, Roku stock trades at just shy of 97 times trailing earnings. Still not cheap, even after suffering a drop of around 60% from peak to trough. Although Roku’s last quarter was underwhelming, it wasn’t at all that bad. Regardless, the valuation received a major reset, one that may not be over yet as momentum chasers continue to pay the price.
Things could go from bad to worse for Roku, as investors find comfort in value over growth. Although the $26-billion company still has plenty of growth drivers to get excited about, its pathway towards greater profitability remains unclear at this juncture.
Roku is still a great company with a bright future. Given uncertainties relating to interest rates (which are in the driver’s seat right now), it’s too difficult to catch a falling knife here.
In 2020, earnings didn’t really matter. Today, earnings matter more than ever before, and price-to-revenues may not be a suitable enough metric to gauge a stock’s intrinsic value.
Roku Stock: Here Come the Analyst Downgrades
At around 12.4 times sales, Roku is the cheapest it’s been in a while. The consensus price target implies around 80% in upside at the time of writing.
Still, one must take such a price target with a grain of salt, given how quickly the tides have turned. Indeed, many analysts have had to downgrade their price targets, ratings, or both after weakness in a stock.
Atlantic Equities’ Hamilton Faber recently slapped ROKU stock with a Sell rating and a Street-low price target of $136 per share, implying Roku’s woes may not yet be over.
What Catalysts Could Reverse Roku Stock?
Roku posted a solid third quarter, but investors who had bid up the stock expected far more. For the quarter, revenue soared 51% year-over-year (a slight disappointment), with per-share earnings handsomely beating expectations ($0.48 versus the $0.06 consensus).
There was a bit of hair on the quarter, though. Customer growth wasn’t as high as hoped, with 1.3 million new accounts, down sequentially and on a year-over-year basis. The trajectory of streaming hours were also not on the right track.
Undoubtedly, year-over-year comparables were harsh for the quarter, but it was the sequential decline in accounts that may be cause for concern. If it is the start of a trend, the fourth quarter could be an ugly one.
The video-streaming space has become quite crowded, as COVID-19 tailwinds fade further. Fortunately, Roku has the means to reignite growth without excessive discounting on its hardware.
The key to Roku’s next leg of growth could lie with its already sizeable customer base. Exclusive content could be key to further monetizing existing Roku customers, primarily via advertising.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, ROKU stock comes in as a Moderate Buy. Out of 20 analyst ratings, there are 15 Buy recommendations, two Hold recommendations, and three Sell recommendations.
The average Roku price target is $350.21. Analyst price targets range from a low of $136 per share to a high of $550 per share.
Bottom Line on Roku Stock
While Roku’s account growth and engagement may be showing signs of slowing, it does have the means to push into greater profitability, as it becomes less of a media device company and more of a creator of original content.
Still, Roku’s $1-billion-plus content spending spree for 2022, while sizeable, may not be enough to reverse the recent trends that have worried investors.
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Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
