Regardless of favorable sector trends, 2021 hasn’t been a great year for Roku (ROKU) investors. Its stock is down about 26% on a year-to-date basis, underperforming the Nasdaq composite index, which is up about 25% during the same period.
What’s Hurting Roku Stock?
Roku is gaining from the ongoing shift of audiences, content, and advertisers toward connected TV. Thanks to the positive secular industry trends, Roku’s active accounts and ARPU (average revenue per user) have consistently increased both on a year-over-year and sequential basis over the past several quarters.
However, the rate of growth in active accounts has slowed on a quarter-over-quarter basis.
It’s worth noting that Roku’s active accounts increased by 11.3% on a quarter-over-quarter basis in the fourth quarter of 2020. This growth has decelerated since then, and the company reported only a 2.4% sequential increase in its active accounts in the third quarter of 2021.
Management blamed the global supply chain disruptions for the slowdown. Further, Roku cautioned that “certain advertising verticals could reduce spend in Q4, due to limited product availability.” Given the challenges, Roku expects the supply-chain problems to hurt holiday season sales. Moreover, increased prices will likely weigh on its margins.
Adding to Roku’s investors’ pain, Michael Nathanson of MoffettNathanson downgraded Roku stock to a Sell, following which it closed 11.3% lower yesterday. Nathanson lowered his price target to $220 from $330.
Website Traffic Trends
Roku’s website traffic trends signaled a slowdown in active accounts, thanks to the strong correlation between the two.
It’s worth noting that Roku’s website traffic surged from 33.1 million in Q3 2020 to 113.1 million in Q4 2020. The massive growth in its website traffic volumes led to an 11.3% jump in its active accounts during the same period.
However, its website traffic has trended lower since hitting record highs in Q4 2020, signaling a slowdown in growth, which is why I maintain a Neutral outlook on the stock.
Now What?
While supply-chain disruptions and higher costs will likely impact Roku’s revenue and margins in the short term, Wedbush analyst Michael Pachter expects the slowdown to be temporary. Pachter said, “We think that once the supply chain disruption lifts, perhaps early to mid-2022, user growth will reaccelerate.”
The analyst remains upbeat on Roku’s long-term prospects and sees “plenty of runway ahead.” However, he lowered his price target to $365 from $415 to incorporate near-term margin headwinds. Pachter has a Buy rating on Roku stock.
Wall Street’s Take
Despite the near-term headwinds, Wall Street is bullish on Roku stock. On TipRanks, Roku has received 20 Buys, 2 Holds, and 2 Sells for a Strong Buy consensus rating.
However, Roku scores a 6 out of 10 from TipRanks’ Smart Score rating system, indicating that Roku will likely perform in line with the market averages.
The average Roku price target of $408.39 implies 66.6% upside potential to current levels.
Disclosure: On the date of publication, Amit Singh had no position in any of the companies discussed in this article.
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, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.
