There is currently great upside in Roku (NASDAQ:ROKU) stock.
Share prices had been floating in the range of $350 to $360 over the past weeks. They tested $370 levels to begin September but have declined below former levels.
Roku stock trades today at a little more than $340 per share.
The bigger picture is that most indications point to a stock trending upward in the mid-to-long term. Roku seems to have been unfairly punished by investors following its Aug. 4 earnings report.
Fundamentally, Roku looked as strong as ever but investors keyed on a single metric, sending prices downward.
I found the reasoning behind that to be flawed. Thus, I’d strongly recommend the streaming company, as cord-cutting will only continue. In any case, the market reaction following August earnings presents an opportunity on the dip.\
Most of the time you would expect returns like those Roku posted on Aug. 4 to send share prices higher, not lower.
Nevertheless, prices did drop from $420 to $390 over the span of two days. They’re now in that aforementioned $360 range. Again, this is very surprising given that those results appeared very strong.
A Closer Look at ROKU Stock
Revenues increased 81% on a year-over-year basis, reaching $645 million in the quarter. The company laid out a bunch of other key results which appeared equally impressive.
- Platform revenue increased 117% year-over-year to $532 million
- Gross profit was up 130% year-over-year to $338 million
- Active Accounts reached 55.1 million, an increase of 1.5 million active accounts from Q1 2021
- Streaming hours were 17.4 billion hours, a decrease of 1.0 billion hours from Q1 2021
- Average Revenue Per User (ARPU) grew to $36.46 (trailing 12-month basis), up 46% year-over-year
One possible explanation for Roku’s underperformance is in the single issue found in the earnings report. That is that streaming hours declined between Q1 and Q2. The 17.4 billion streaming hours Roku recorded in Q2 represented a decline of 4.92% over the 18.3 hours streamed in Q1.
A recent article by Louis Navellier and his research team found a reasonable explanation provided by Roku itself. Essentially, people went outside and watched less TV as Covid-19 restrictions were lifted during the quarter.
Navellier’s team came to the same conclusion that I have: It doesn’t really make much sense to punish ROKU stock, and you can’t blame human beings for being human.
But what you can do is take advantage of the buying opportunity. The truth is that Roku is a well-regarded platform, product and service.
Roku also was acknowledged by companies that report on the industry, earning Best Stramer Overall from CNET and the Editor’s Choice award from TechHive.
Additionally, Tom’s Guide awarded the Roku’s TV models, the TCL QLED and Mini-LED “Best TV innovation.”
Accolades like those only further serve to fortify the bullish sentiment underpinning the idea that Roku is doing very well and the market behaves strangely. Roku is indeed part of a larger trend that shows no signs of slowing: People are watching less tv but much more of Roku as a streaming platform.
In the second quarter, TV viewing was down 19% while Roku was up 19%, each on a year-over-year basis. Further, streaming as a whole was down 2% during that time frame but Roku improved by 19%.
Takeaway
I’ve already let the cat out of the bag: I strongly believe Roku is a worthwhile investment right now. In fact, the average target stock price is $483.09. That implies more than 30% upside from current prices.
The market can be a fickle place. I believe that is evident in what has happened to Roku, but the greater truth is that the market also rewards strong companies with strong fundamentals over the long term.
That’s what Roku is: a company worth buying because the market will come to its collective senses sooner or later.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”
