Roku Inc (NASDAQ:ROKU) was due for a major setback. This isn’t an indictment of the company — I am optimistic about Roku in general. But often, the hype of an IPO can create a bubble that eventually needs to pop.

The Roku bubble popped after Wednesday’s close. ROKU stock price tanked to the tune of 22% in yesterday’s after-hours trading when the company offered guidance that wasn’t quite as fabulous as the market was hoping for. Shares were still down around 16% early Thursday.

Ugly? Indeed.

But this is one of those falling knives you may want to catch.

Roku Earnings Recap

For those not familiar with the company, Roku makes internet-television streamers comparable to the digital-TV set-top boxes made by Apple Inc. (NASDAQ:AAPL) and the Amazon.com, Inc. (NASDAQ:AMZN) Fire stick. It’s not a cable box. Rather, it makes services like Netflix or streaming feeds from cable companies easy to view.

Roku has been selling devices of the same name for a while, but it only went public in September of last year. Wednesday’s earnings report was the company’s second as a publicly-traded entity.

The market wasn’t thrilled with the report. But the problem was not with last quarter’s results. For the quarter ending in December, Roku Inc earned six cents per share on $188.3 million in sales — a top line that was up 28% year-over-year. Analysts were looking for a loss of 10 cents per share of Roku stock and revenue $182.5 million.

The full-year and current-quarter guidance really nagged investors, however. For all of 2018, the company believes it will drive between $660 million and $690 million in revenue, and lose between $40 million and $50 million. The expected revenue is optimistic relative to the $661.5 million outlook the pros had modeled, but those same pros were also only looking for a loss of $35.9 million.

And the company isn’t off to the best of starts to the new year, only expecting sales of between $120 million and $130 million for the first fiscal quarter ending in March. Analysts, on average, were calling for a top line of $131.7 million.

Reality Check

While the knee-jerk response is understandable on the surface, it also dismisses a handful important truths.

Chief among them is the reality that this is a very young company operating in a very young and constantly-evolving market. Any analyst outlook is an educated guess, at best, and the company’s guidance is only a slightly more informed opinion. The earnings and revenue beat mean very little, as does the disappointing guidance.

Augmenting this is the fact that Roku’s business model is changing rapidly.

Historically speaking, Roku’s core source of revenue was device sales with a smattering of revenue generated by the inclusion of apps on said devices.

Now, Roku sells advertising space on the main screens of the device’s interface and licenses its technologies to TV makers that want to build Roku tuners into their televisions.

The proof of this is in the earnings report: last quarter, 45% of the company’s revenue was driven by licensing and advertising. In the same quarter a year earlier, only 25% came from ads and licensing. The rest was revenue from sales of its devices.

Moreover, 87% of Roku’s gross profits last quarter came from advertising and licensing, up from 65% a year earlier.

The company also had to eat a large one-time expense this quarter. CEO Anthony Wood explained that an industry-wide shortage of the NAND memory chips Roku needs for their devices, forced the company to pay for expensive air freight to get the chips to keep up manufacturing.

It’s also plausible that investors were waiting for any excuse to take profits, and the less-than-stellar outlook was a “good enough” reason.

Bottom Line for Roku Stock

So, I stand by the assessment I voiced several times late last year.

Roku is a company with a compelling future, but ROKU stock needed to suffer its inevitable post-IPO capitulation. We just got it.

Now patient bystanders who’ve been waiting on a safer entry point can start to wade in.

This is a company that’s still expected to grow its top line by roughly 30% this year, and do the same in 2019. Those outlooks may be too conservative, in fact.

The pace of cord-cutting is not only fast but accelerating and Roku stands to profit directly.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.