Roku (NASDAQ:ROKU) stock’s fall from grace has been swift and steep, leaving owners of ROKU stock reeling.
The California-based manufacturer of internet connected television sets and digital media players has seen its share price fall 35% in the past seven weeks, plummeting from an all-time high of $490.76 on July 26 to its Sept. 15 opening price of $317. The drop has wiped out all of ROKU stock’s gains for the year and the decline has continued unabated in recent trading sessions.
While no doubt frustrating, there is reason to remain optimistic about Roku and its long-term prospects. If anything, investors should see the current pullback as a buying opportunity.
Shock and Awe
The sharp decline in ROKU stock came after the company reported its second quarter earnings in late July. Investors 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.
While there was plenty of good news in the second quarter results (revenue grew 81% year-over-year to $645 million and operating income reached $69.1 million compared to a loss of $42.2 million a year earlier), the decline in streaming hours grabbed all the attention and investors hit the “sell” button on Roku stock.
The slump in ROKU stock has been exacerbated by media reports 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.
The Amazon televisions will also be competitively priced, starting at $370 each, making them a significant threat to Roku’s devices. Internet connected TVs and other streaming devices appear to be the future and Roku’s products are looking less unique to Wall Street analysts.
While its device segment is under threat, Roku is managing to increase the revenue it generates from online advertisements, which industry analysts have applauded and see as the future growth trajectory for the company. In the second quarter, Roku’s advertising revenue grew 117% to $532 million, showing real momentum and outpacing the other areas of the company’s business. The launch in this year’s first half of several new advertising supported streaming services from other companies in the space helped boost Roku’s ad sales during Q2.
Industry data suggests that Roku has a big opportunity in front of it with advertising on connected television sets and other devices. According to market research firm eMarketer, advertising spending on internet connected devices is estimated to grow 288% from $6.4 billion in 2019 to $24.8 billion by 2024.
Roku’s ad revenue over the last four quarters totaled just $1.7 billion, suggesting plenty of room for future growth. The company has reported that 42% of the advertisers that bought ad time on its platform were first-time buyers, a sign that advertising on digital platforms rather than traditional television networks is growing at a brisk clip.
Have Faith in ROKU Stock
Despite the current pullback, investors should continue to have faith in ROKU stock. Wall Street certainly does. The median price target on the shares is $486.50, implying a 53% future gain. The high target on the stock is $650 per share.
Additionally, investors should take heart from the fact that Ark Invest’s Cathie Wood, the notorious technology bull who invests almost exclusively in disruptive technologies, has been buying Roku shares for her exchange traded funds (ETFs) as the stock has cratered in recent weeks.
Other reasons to remain bullish on Roku stock is that the company is pursuing an original content strategy that is getting much love from analysts, and rumors persist that Roku could be the target of a takeover, notably by Comcast (NASDAQ:CMCSA) which has been circling the company lately.
While the decline in Roku’s share price has been painful and could continue for several more weeks, the pullback is likely to be short-lived and patient shareholders will be rewarded by the stock’s appreciation over the long-term. Buy the pullback in ROKU stock.
On the date of publication, Joel Baglole 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.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.