While it’s easy to take for granted the mercurial rise in over-the-top digital media hardware specialist Roku (NASDAQ:ROKU) based on the novel coronavirus pandemic, it’s also important to recognize what came immediately before it. Leading up to the outbreak-fueled lockdowns and mitigation measures, ROKU stock was actually on a downtrend since early September 2019.
It was only after shares bottomed following the initial burst of panic that people recognized the broader catalyst for streaming entertainment-related investments. With powerhouse states like California clamping down on non-essential activities, that meant traditional out-of-home amusement plays would be taken out of commission. Cynically, this dynamic presented a gift of a tailwind for ROKU stock.
Sure enough, the equity unit took advantage. Just before ROKU stock rung in the new year, it had returned stakeholders 144% in 2020 for their foresight. This time around, it’s a different story.
On a year-to-date basis, ROKU stock is barely above parity — and by the way that it’s looking, it might not be long before it’s printing red ink. Over the trailing month, shares have dropped 8%.
What gives? As our own Joel Baglole mentioned, investors have not been able to get over the tough news that management disclosed in its second-quarter earnings report in late July. The market “got spooked after Roku management reported that streaming hours on its devices declined by nearly 1 billion hours between the first and second quarters as the economy reopened and people ventured out of their homes again.”
Too much pessimism over an expected circumstance following a once-in-a-century pandemic? Perhaps but it’s also fair to point out the boomerang effect. Essentially, what the global health crisis giveth, it taketh away. With so much optimism baked into Roku, it was time to bail.
ROKU Stock Dealing with an Admission of Continued Loss
However, the buy-low-sell-high contrarian in us might appreciate the red ink as a buying opportunity. Baglole mentioned in his catchy headline that ROKU stock had incurred seven weeks of panic selling. At some point, the optimism for a relevant streaming entertainment company should return.
And I can appreciate the sentiment. Indeed, there’s a certain romance about going against the grain, recognizing an opportunity that so few see and being able to profit from it. Few things in the professional realm are as satisfying as financially benefiting from your prescience.
At the same time, this romantic concept is almost surely overstated. Yes, it happens on occasion that lone-wolf traders teach Wall Street a lesson – just look at the meme stock phenomenon! But in arguably most cases, the market wins.
That’s why in the show Who Wants to Be a Millionaire, astute contestants save the poll the audience lifeline for an inquiry that would cater to collective wisdom. Unless everybody suffers from the Mandela effect regarding a particular question, polling the audience can be quite effective – actually, extremely effective when deployed correctly.
I see a similar situation with ROKU stock. Losing nearly a billion hours of watch time on a sequential quarter-to-quarter basis is a massive headwind. It’s basically an admission that Roku’s valuation is based on a circumstance that is simply not sustainable. Look, the whole face mask and vaccine issue wouldn’t be so charged if all Americans were natural homebodies.
They aren’t, as Roku’s earnings report demonstrated.
Yes, the Delta variant – or any other variant – could put audiences back into their living rooms. But how long can investors rely on such a cynical tailwind? That’s why ROKU stock has been printing ugly chart patterns recently and it may not improve for a while.
More Concerns on the Horizon
As if the company needed more obstacles, Baglole also mentioned “that Amazon (NASDAQ:AMZN) is launching its own line of internet connected TV sets that will also be compatible with the company’s Alexa voice controls, providing a strong and direct challenge to Roku.”
I think earlier, the Amazon threat wasn’t as pronounced. However, as technology improves and as the cost of smart TVs come down, an add-on device will be less meaningful (or even sensible) for consumers. And sure, Roku is pursuing an original content strategy but even that will be rife with challenges as so many companies are squeezing into that space.
I’m not suggesting that ROKU stock is a bad investment. I’m just not sure if buying shares at this price is worthwhile.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.