Roku has grossly underperformed the market this year, but the ongoing sell-off presents an attractive buying opportunity for investors.
Nov. 26, 2021
Shares of streaming company Roku (NASDAQ: ROKU) are currently trading at $231.45, more than 50% below its record highs. However, the pullback provides investors an opportunity to buy a quality growth stock at a much lower multiple. Let’s see why Roku is the one tech stock I’m buying right now.
A look at Roku’s financials
In the third quarter of 2021, Roku reported revenue of $680 million and adjusted earnings per share of $0.48. Comparatively, analysts forecast the company to post revenue of $683.4 million and earnings of $0.60 per share in Q3.
The streaming giant ended Q3 with 56.4 million active accounts, up from 55.1 million in the second quarter. Its streaming hours touched 18 billion hours while average revenue per user soared by 40% year over year to $40.10. This allowed its Platform revenue to increase sales by 82% year over year to $583 million.
The company’s sales rose by 51% year over year while operating income surged by 475% year over year to $68.8 million.
What investors should like about Roku?
The streaming industry is poised to benefit from multiple secular tailwinds in the future. Roku is platform agnostic, making it one of the top bets in the streaming sector right now. Moreover, it provides the required tools to content publishers that help them build and engage their audience base. This results in higher media and entertainment promotional spending.
Further, as publishers continue to launch their own channels, the distribution of U.S. streaming hours on the Roku platform has shifted. In Q3, channels outside the top 10 streaming services increased total streaming hours market share by five percentage points.
A key driver for the company’s top-line is the Roku Channel, which will bring in additional users and grow ad sales. The Roku Channel increased user engagement and reach in Q3, fueled by its content strategy that included licensed and original content.
Risks to Roku’s stock price
The company’s management forecast Q4 sales between $885 million and $900 million which were below consensus estimates of $944.4 million. So, Roku’s sales in 2021 might grow by 57% to $2.8 billion valuing the stock at a forward price to sales ratio of 11x, which might seem expensive. Its price to earnings multiple is also sky-high at 147x, making the stock vulnerable in the broader market sell-off.
Roku’s revenue and earnings miss and less than impressive future guidance coupled with nosebleed multiples have driven shares lower in 2021. Roku stock will continue to underperform the broader market if its revenue growth continues to decelerate at an alarming pace.
Investors might continue to be impacted in the near term, given global supply chain disruptions. The headwinds might further impact Q4 sales despite the accelerated shift towards streaming.
Roku’s growth potential
While there are near-term concerns, Roku’s fundamentals remain robust. However, it’s impossible to time the market, and the ongoing correction in Roku stock should be viewed as a buying opportunity.
Analysts tracking the stock forecast Roku to touch $398 in the next 12-months, which is almost 100% higher than its current price.
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