Investing in initial public offerings (IPOs) can be risky business. Roku Inc (NASDAQ:ROKU) stock is the latest evidence as to why.
Shares of the streaming device company came public a month ago at roughly $29 per share. The ROKU stock price is currently down to $19, and falling fast. It’s not the first time a high-profile tech IPO has gone belly-up in its first few weeks of trading. It also doesn’t mean that ROKU stock is doomed to fail.
Even Facebook Inc (NASDAQ:FB) famously struggled from considerable hype after coming public. Roku ain’t Facebook, but it is a tech company that the general public knows well, which is a recipe for an overvalued IPO. Sure enough, ROKU stock priced at the high end of its expected IPO range ($14) and was overvalued out of the gates given its lack of profits and modest sales growth for a young tech company.
Little Known About ROKU Stock
Sometimes, it takes a few quarters for new stocks to mature, as investors get a grasp of where a company should be valued. At a minimum, you should wait one full quarter, or three months, to gauge how analysts’ topline and bottomline expectations compare to the company’s actual results. Few things move the needle for a recent IPO like an earnings beat.
Right now, there is very little Roku earnings data. A date for its first earnings report as a public company has not been set, and there are no analyst estimates for Roku’s fourth-quarter results. Thus, Wall Street is still sizing up the stock. Those who are taking a measured approach are playing wait-and-see with the stock. Those who bought in early on ROKU stock only to realize that it was overvalued from its very first trade (at $29, or more than double the IPO price) are selling out of it in droves. Hence, the ROKU stock chart looks like a mess.
Good or bad, there’s always a storm that follows an anticipated IPO. It either explodes and keeps riding the initial momentum, or gets punished for being overcooked. Either way, the storm tends to last about three months. And right now, ROKU stock is still in the middle of that storm. Two months from now, investors will be able to assess the stock in a more rational, level-headed way. Until then, it’s a rush for the exits, as the die has been cast on ROKU being not worth the steep price tag.
By year’s end, investors may see some things to like about ROKU. Namely, that it has 15.1 million active accounts, way more than Verizon Communications Inc. (NYSE:VZ) and nearly as many as Dish Network. It’s growing its user base by an average of 42% annually and its hardware devices are compatible with all the big names in streaming video, including Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).
Roku is not without problems—it doesn’t have an international footprint, its growth may have peaked, and the aforementioned lack of profits. But with the stock price in sharp decline, the positives may soon outweigh the negatives now that shares have tumbled into the teens.
Be Patient with ROKU
Should you buy ROKU stock two months from now? Frankly, I don’t have enough information to make that decision yet, and neither do most of the people telling you it’s already a dud. My advice is to wait until the first earnings report, or at the very least for some consensus analyst estimates to emerge, before deciding whether or not ROKU stock is a good investment.
What looks like a disaster may well look like a bargain come holiday shopping season.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
