Roku (NASDAQ:ROKU) stock remains far off of pandemic highs during which it soared to prices that approached the $500 mark. Today it trades under $95, setting up a buy-the-dip opportunity in the eyes of many.
I hesitate to see the logic in taking that bet for the most part. For long-term investors patient enough to wait years, the bullish case is sound. For others looking for a quick buck, the logic looks flawed.
Eschew Wood’s Moves With Roku Stock
The fact that Cathie Wood recently made Roku stock the flagship holding in her ARK Innovation ETF (NYSEARCA:ARKK) had predictable effects. It bolstered the confidence of investors who might have otherwise been hesitant to purchase shares.
The move was noteworthy for the fact that Roku briefly usurped Tesla’s (NASDAQ:TSLA) position as the largest holding in her ARK Innovation ETF. In other words, if her firm, as a growth-oriented venture, is confident in Roku then all growth investors ought to be.
That logic is reasonable enough. However, Roku is no longer the top holding and with both Tesla and Zoom (NASDAQ:ZOOM) holding greater value within the fund.
There’s nothing particularly important about this news. Wood hasn’t proven to be any sort of stock savant with her flagship fund suffering along with growth stocks at large during 2022.
Trouble Will Continue
The notion that Roku should rebound anytime soon seems flawed to me. Why should growth stocks suddenly become more attractive with rate hikes expected throughout the remainder of this year?
While revenue growth showed strength in Roku’s most recent earnings report, it’s the losses that should be more concerning. Roku netted $76.3 million in Q1 of 2021. It lost $26.3 million in the same quarter this year.
This trend isn’t expected to taper off soon, either. Firm guidance is that Roku will report a loss of $109 million in the second quarter of this year yet it reported a net gain of $73.46 million during the same period a year earlier.
The notion that increasing interest rates and future losses are already priced in doesn’t hold up in my opinion. Therefore, it’s difficult to see why ROKU stock should reasonably be expected to bounce back soon.
The longer-term outlook is different.
My colleague Mark Hake put together a compelling argument for Roku stock over the long term based on the company’s historical P/S multiples.
The data clearly shows that investors aren’t willing to pay as much for Roku’s revenue currently. That will change as growth swings back into favor, as Hake rightly suggests. But that isn’t likely to happen in this rate environment and will likely require an investment horizon of years.
For those willing to be that patient, it’s a strong bet. For others, expect stagnation in the short term.
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.