Roku stock is down 33% in the last three months. Sure, this might look like a buying opportunity in so many ways.
First, the company dominated the stay-at-home stock trend, pushing the stock from $80 to $460, or 475%, within a year.
And even while we phase out of the stay-at-home trend, Roku threatens to dominate the streaming TV industry overall. The company has over 43 million active accounts and counting.
On top of that, it just delivered a killer quarterly earnings report.
What's to stop you from buying?
Now, with Roku stock on a hefty dip, you may feel invited to swoop right in for another quadruple return. But don't be fooled.
We'll help you decide when to buy Roku right now. First, here are a few things you should know about the company currently.
Roku Inc. (NASDAQ: ROKU) has been one of the leaders of the cord-cutting movement. The company makes streaming players and smart TVs and operates the Roku streaming platform. It has hundreds of channels available, and you can select just those you want to pay for and enjoy. There are also free streaming services that offer news, entertainment, and even live sports.
Roku has all the premier paid streaming networks like Discovery Plus, Disney Plus, HBO Max, Paramount Plus, Peacock, Amazon Prime Video, AppleTV, Hulu, and Netflix. That means users can pick the content they want and skip everything else.
The average cord cutter that switches from a cable TV option to the cafeteria-style streaming services offered by ROKU can save hundreds of dollars annually.
The pandemic was a huge boost for Roku. Millions of people were stuck at home with nothing to do but watch TV. The idea of saving money and only using the channels you really want made a lot of sense to people stuck at home worrying whether their jobs were essential or not.
Roku was a significant beneficiary. People bought up the device, and advertising money flowed into the service.
We're still seeing the effects of that in 2021, with the Q1 Roku earnings report.
Earlier this month, Roku reported first-quarter earnings of $76.3 million, or $0.54 a share. That was not only a vast improvement over last year's quarter loss of $54.7 million, or $0.45 a share. It blew away analysts' expectations of another $1.30 per-share loss.
It was a blowout quarter. Platform revenue increased 101% to $466.5 million as total hours watched jumped to over 18 billion in the quarter.
Roku added another 2.4 million accounts in the quarter and now has more than 53 million users on the service.
It was the fourth consecutive positive earnings surprise and the third triple-digit surprise in a row.
These better-than-expected results have analysts scrambling to raise their estimates for both 2021 and 2022.
The stock rallied briefly after the report but has sold off sharply since. Roku has fallen from $377 to today's level. Shares broke below $300 briefly before recovering a little.
With such impressive results, why is the stock dropping?
One reason is that traders are starting to sell the stay-at-home stocks.
The end of the pandemic is in sight. People are going back to work, and more states are opening their economies all the way this month. Viewing hours of all streaming services will likely decline.
It is also worth noting that the streaming market becomes more competitive every day.
Roku is going head to head with giants like Alphabet Inc. (NASDAQ: GOOG), Apple Inc. (NASDAQ: AAPL), and Amazon.com Inc. (NASDAQ: AMZN), as well as streaming-enabled gaming consoles from Sony Corp. (NYSE: SNE) and Microsoft Corp. (NASDAQ: MSFT).
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Those are some heavy hitters with a massive amount of cash to spend on pursuing market share if they choose to do so.
Some of the bigger streaming networks like Walt Disney Co.'s (NYSE: DIS) Disney Plus, Netflix Inc. (NASDAQ: NFLX), and Hulu have balked at paying the 20% revenue cut that Roku wanted and negotiated lower-priced deals. It is highly likely that other networks will start pushing for similar fee reductions.
In a highly competitive market, Roku cannot afford to lose popular networks, so it will have to accept some lower fee arrangements.
With that said, here's the outlook on Roku's place in the cord-cutting market.
Cord-cutting is here to stay. Roku will keep growing, but as competitors start to focus on their streaming operation, growth rates will begin to slow from the current rapid pace.
One of the most significant issues impacting Roku right now is valuation. The company is now projected to make $0.31 a share.
That means the stock is trading for more than 900 times what Wall Street hopes it will make this year.
Next year, the estimate is for profits of $0.99 a share.
That means the company is trading for more than 300 times profits in 2022.
The stock trades for more than 20 times sales.
Roku is priced for perfection and beyond. But with the increased competition and pricing pressures, it will be difficult for Roku to grow fast enough to justify the current price.
The other problem the stock has right now is that Cathie Woods Ark Investments is one of the largest shareholders. In fact, Roku is the fourth largest holding in the Ark Innovation Exchange (ARKK) traded fund.
Any time there is excessive selling in the ETF, shares of Roku will automatically be sold.
Ark Innovation shares are down more than 30% in the past three months, putting some serious headwinds in front of Roku shares.
Roku is a great company. It will still grow faster than most.
It is just not anything remotely resembling a bargain, even after the recent sell-off.
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