Roku’s Technology Is Great, But Don’t Buy Roku Stock

Tough competition and a lack of profitability prevent Roku stock from being a good investment

7 A-Rated Stocks to Buy for the Rest of 2019 Roku (ROKU)

Source: Shutterstock

Roku (NASDAQ: ROKU) stock has been in and out of fashion more than Cher.

When the maker of streaming-video equipment went public in 2017, Wall Street thought it could do no wrong. ROKU stock price more than doubled during its first three days as a public company, making founder Anthony Wood a billionaire. Fast forward to 2018, and the “smart money” decided that the Los Gatos, Calif.-based company could do no right.

It’s a classic case of expectations getting ahead of themselves. Roku stock tanked in February after the company gave earnings guidance that, in the words of MarketWatch, didn’t “blow away investors who had sent shares soaring” even though it had exceeded analysts’ forecasts.  

The same thing happened in November, when Roku’s platform advertising and average revenue per user numbers lagged Wall Street’s forecasts. The company plans to report fourth-quarter earnings sometime in February, though for some weird reason it hasn’t yet provided a specific date. But Roku stock has plenty of upside potential and more than its share of fans who have sent its price skyrocketing nearly 40% since the start of the year. 

Wall Street analysts have an average price target of $54 on Roku stock, roughly 25% above its current price. Roku has an industry-leading, 37% share of the streaming-equipment market, topping much larger rivals, including Amazon (NASDAQ: AMZN), Alphabet’s Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL).

Roku’s active accounts grew an impressive 40% in Q4, exceeding 27 million. As a result, Roku considers itself the third-largest Pay TV provider behind Comcast (NASDAQ: CMCSA) and AT&T (NYSE: T).  Roku’s streaming hours surged 68% year-over-year to 7.3 billion. Through Roku Channel, Roku’s customers can buy premium subscriptions. The company also sells advertising and streaming services, which has the potential to be a huge money maker.

Doubts about Roku stock, however, persist.

Analysts Are Lukewarm on ROKU

Needham Analyst Laura Martin, perhaps the biggest Roku stock bull on Wall Street, on Dec. 12 slashed her price target on ROKU from $85 to $45, arguing that the economic slowdown in China was affecting U.S. sales of TV sets made in the Asian country. Martin kept her “buy” rating on ROKU. And in a confusing move, she declared ROKU to be her “top pick” for 2019 less than a month later.

Citi analyst Mark May further frustrated fans of Roku stock with his recent “neutral” rating. He argued convincingly that Roku will face higher costs due to its increased competition and its international push. The veteran analyst also raised concerns about the valuation of Roku stock and called Wall Street’s forecasts for the company too aggressive. His price target on ROKU is $44.

The Bottom Line on Roku Stock

Investors need to separate their enthusiasm for Roku’s products from their analysis of the company’s stock. A whopping 20% of the float of ROKU is held by short sellers, according to the Wall Street Journal.

Tech review sites such as Tom’s Guides sing the company’s praises, but Roku’s dominance may be short-lived because its main rivals such as Alphabet’s Google and Apple are so huge that they could bury ROKU at the click of a computer mouse. 

I know that some have speculated that Roku might be acquired.  I am not sure whether such a transaction would be approved by regulators, since the streaming-device market is controlled by relatively few companies, assuring that the acquirer of ROKU would have a dominant share of the market. 

Furthermore, profitability has proven to be elusive for ROKU, and it’s unclear whether it will ever be able to meet the demands of the fickle investing public, which is why I am taking a pass on ROKU and encouraging others to do the same.

As of this writing, the author did not own shares of any of the companies named. 

Article printed from InvestorPlace Media,

©2019 InvestorPlace Media, LLC