Roku Stock May Finally Be a Buy After Its 40% Decline 

Roku (NASDAQ:ROKU) was once the name that could do no wrong. Shares blistered higher, without a thought or worry regarding its valuation. Roku skyrocketed from sub-$30 in late December to more than $170 at one point last month.

Roku Stock May Finally Be a Buy After Its 40% Decline 
Source: Michael Vi / Shutterstock.com

The last leg of the move was clearly a parabolic move. Blow-off rallies like that rarely end well.

When Roku reported its most recent quarterly results after the close on Aug. 7, the stock closed at $100.97. The results were stellar and so was management’s outlook.

The stock would top out about a month later in early September, after hitting $176.55. In other words, despite Roku rallying 270% year-to-date into the earnings report, it rallied another 75% in one month after its report. It’s the definition of over-exuberance.

Remember, I’m a supporter of Roku and have been behind it since last December, but you don’t have to like the stock even if you love the company and its story.

After the post-earnings surge, we were warning investors are about the rapid ascent. After a brutal correction, Roku stock fell more than 40%. Shares are now hanging around Roku’s pre-earnings levels, near $100. Let’s see if now’s the time to start getting long.

Why Roku?

Roku gets a lot of hate and I think it stems from three things:

  1. Those who missed the rally
  2. A high valuation by traditional metrics
  3. “It’s just a stick”

Investors can blindly snub the stock for one or all of the reasons above, but it won’t make them any money. That doesn’t mean they have to own Roku or if they don’t own it, that they believe one of the things above. It just may not fit their investment parameters, and that’s fine.

For everyone else though, let’s dig.

First, you shouldn’t hate a stock just because you missed out on its upside. That happens to everyone. I find it’s best to wait for big pullbacks in the stock, decide if the story is the same (or better) and use that volatility to your advantage.

Second, the stock does have a high valuation. Even though Wall Street has been far too conservative on its revenue figures, it’s forecasting $1.1 billion in sales this year and $1.5 billion in 2020. In-line results would represent 48% and 36.5% growth, respectively.

At its peak, Roku stock traded with a near-$20 billion market cap, making it quite expensive. At a $12.5 billion market cap now though, I think it’s more reasonable. That’s about 8 times forward sales, not cheap by traditional metrics but not horrendous given its growth amid a booming secular shift to streaming video.

Remember, weren’t not valuing General Motors (NYSE:GM) or Nucor (NYSE:NUE) here.

Finally, way too many people say “Roku is just a stick, anyone can make a stick.” They then conclude that Roku is going up against Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) and will therefore lose.

Never mind that Roku is a market-share leader (while Google is last) and that as streaming video increases as part of the secular, long-term shift like eCommerce, Roku is a natural beneficiary.

Its product price point is attractive, its operating system is simple and its traction with consumers is undeniable. Further, Roku’s potential is not about the hardware, it’s about platform revenue. Growth in this segment remains robust, with sales surging 86% last quarter.

Investors don’t have to like Roku, but those that say “it’s just a stick” aren’t even trying.

Roku’s Future

It will be a bumpy road, but the long-term trends favor Roku. Streaming video is a long-term secular trend, as Roku and others should continue to see expansion as the years go on. As the industry moves forward and the ad industry starts to get a better hold on personalized advertisements vs. advertising aimlessly to an entire audience regardless of demographics, the potential for Roku will really open up.

As one piece of research, titled “Generation Z as Consumers: Trends and Innovation,” by Stacy Langwood of N.C. State University, stated:

“Generation Y saw [being monitored by large companies] as an acceptable and normal practice that would help companies deliver better and more customized products to them…Generation Y felt much more comfortable “being known” by the company and receiving predesigned options. Generation Y, and it is generally believed for Generation Z, are much less likely to be concerned about privacy issues than Baby Boomers and Generation X.”

This may not be the story next month or next quarter, but it’s a serious component to Roku’s long-term growth potential.

As long as Roku is viewed as “just a stick” though, key platform developments and advantages such as the one stated above will go over the doubters’ heads. That gives patient, long-term investors an opportunity.

Trading Roku Stock

chart of Roku stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com

Shares are back down near $100, but I would have liked for a larger decline. That would have flushed out all of the weak hands and late buyers. Down about 40% from its highs though, and long-term investors can start picking at Roku stock.

If they are able to buy more on a deeper decline, all the better. Should shares rally from here, at least investors will own a partial stake for the rebound, rather than no stake at all.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL, GOOGL and ROKU.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/roku-stock-buy-after-decline/.

©2022 InvestorPlace Media, LLC