Roku (NASDAQ:ROKU) was one of many companies that sent representatives to Washington, D.C. recently to argue against tariffs. Like other firms, ROKU stock could fall if duties hamper growth of its customer base or push TV manufacturing into another country.
More than that, thanks to its five-fold increase since late 2017, Roku stock supports an astronomical price-t0-cash flow valuation of more than 600x. Although ROKU will likely become a long-term winner, the shares will probably struggle to support its current price in this difficult environment.
Roku Owns The Future of Streaming
Whether one is a bull or a bear on Roku stock, most now believe in the company’s future. Against much larger players such as Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), and Amazon (NASDAQ:AMZN), it has taken the lead in the streaming market.
Since it does not offer streaming of its own, it has no biases between Apple TV, Prime Video, or Netflix (NASDAQ:NFLX). Even better, it has built an ecosystem that combines these services and earns revenue from ads on its platform. Now, Chinese-made Roku-equipped TVs, boxes, and dongles bring this ecosystem to millions of new consumers every year.
Tariffs, Multiples Threaten Move Higher
That China-dependence makes tariffs a problem. Roku derives a significant amount of its revenue by selling TVs to U.S. consumers. That, along with video set-top boxes and dongles provide the conduit by which users can access the Roku streaming ecosystem. Although Roku loses money on equipment anyway, lower equipment sales would lead to lower growth for the platform. That does not count the Chinese customers lost as the market faces more obstacles.
The effect on Roku stock may have only just begun. Since peaking at over $108 per share on June 20, Roku stock went on to lose about 8% of its value over the next two trading sessions. Now, the Roku stock price struggles to hold the $100 per share price level.
Since Roku stock has moved ahead of its fundamentals, the stock could suffer further. ROKU also trades at about 13.2 times sales. The trade dispute has brought flaws to a stock priced for perfection.
Traders need to also remember that the current bull market has reached its 11th year. While that does not compare to the 27 years of Australia’s current expansion period, it comes in at more than twice as long as the average bull market. So far, no signs to the bull market’s end have appeared. Still, if one occurred, Roku stock would probably not support its current multiple.
Roku Stock Will Stream Profits Long Term
Despite my feelings on the stock, I think ROKU will sell at a higher price several years from now. Once streaming sees more widespread adoption, the market cap will significantly exceed the current $11.3 billion level. Moreover, both sides in the Beijing-Washington trade dispute face political and economic pressure to come to an agreement. This will end the battle at some point.
Furthermore, despite these concerns, Wall Street expects revenue to increase by 41.4% in the current fiscal year and 34.1% in 2020. Net profits could come as soon as 2021. With this level of streaming in Roku’s future, Roku stock is a buy on any significant pullback.
Bottom Line on Roku Stock
Roku will own the future of streaming, but the state of U.S.-China trade could make its current valuation unsustainable. Roku appears poised to own the future of streaming. Little wonder it has risen five-fold in the last 18 months.
However, Roku faces challenges with the tariffs. Not only does it want to penetrate the Chinese market, but it also depends on the country to make its TVs. This situation may already have led traders to question its multiple as the stock continues to sell off.
Roku stock will trade at much higher levels in the future. But given the current business climate, more can go wrong than go right.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
