What to make of Roku (NASDAQ:ROKU) stock after the company reported yet another disappointing quarter and its share price continues to slide downward?
Shareholders of the video streaming and internet-connected device company had their fingers crossed for a rebound in Roku stock after the company delivered Q3 results. After all, the shares had been basically flatlined after Roku reported in the second quarter that the number of streaming hours on its devices declined by 1 billion hours in the spring as consumers emerged from Covid-19 hibernation and the economy rebounded.
Unfortunately, Roku’s latest quarterly report did nothing to reassure industry analysts and institutional investors that the company is on the road to recovery. As a result, Roku’s stock has fallen a further 13% over the past week. At just over $275 a share, Roku stock is now 44% below its 52-week high of $490.76.
Roku’s third-quarter report was actually not that bad. The Los Gatos, California-based company’s revenue for the July through September period came in at $680 million, which was a hair below the $683.4 million that Wall Street had expected, but up 51% from a year earlier. Roku’s earnings per share came in at 48 cents, which beat expectations for earnings by a healthy 6 cents per share.
Also strong was Roku’s active accounts, which rose 23% year-over-year to $56.4 million. That’s also an increase of 1.3 million active accounts from this year’s second quarter. All in all, Roku’s Q3 showed a recovery from the previous quarter that had soured many people on the company.
A particular bright spot was that streaming hours in the quarter rose 21% from a year ago to 18 billion, with active accounts averaging 3.5 streaming hours a day. However, Roku’s forward guidance underwhelmed and gave the impression that the company’s outlook is getting cloudy.
Specifically, Roku said that it expects global supply chain disruptions to continue impacting its internet-connected TVs and other devices into 2022 and impact product pricing and availability during the upcoming holidays. Additionally, Roku’s TV sales in the third quarter fell below pre-pandemic levels in 2019.
That guidance and sales forecast led shareholders to hit “sell” on Roku stock.
As Roku stock continues to slide, there are people raising questions about whether investors are overreacting to the company’s third quarter report, which wasn’t all that bad. Some analysts who follow the company closely are pointing out that margins on electronics hardware such as TV sets have declined this year due to increased shipping costs.
However, Roku has no plans to increase its prices as the company remains in growth mode and is focused on gaining market share. Management has stated that it believes the decrease in margins is temporary and should not impact its long-term growth trajectory.
Also worth considering, Roku’s revenue generated from advertising sales surged 82% in this year’s third quarter. This is important as many industry observers see Roku’s future growth tied to advertising more than hardware sales from connected TVs and other devices.
With advertising trending in the right direction, it underpins Roku financially and shows that the company continues to make strides despite the current challenges it is experiencing with the global semiconductor shortage and supply constraints. Challenges that are weighing on other companies ranging from General Motors (NYSE:GM) to Apple (NASDAQ:AAPL) right now.
ROKU Stock Needs Time
For the long term, Roku remains a positive story and a good investment. And if Roku stock was on sale before its third quarter results, it is at fire sale prices today. The median price target on the stock is currently $400 per share, which would result in a 45% increase from current levels. The lowest target on the stock is $295, which is 7% higher then where the share price currently sits.
However, in the near term, the narrative surrounding Roku is negative and the stock continues to trend lower. Investors willing to hold the stock long-term should definitely buy now.
Otherwise, give ROKU stock time to recover and for sentiment related to the company to improve before taking a position.
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.