In my last article about Roku (NASDAQ:ROKU), published at the end of December, I called Roku stock a candidate for Stock of the Year. After the shares soared 337% in 2019, it was pretty hard not to pick the video streaming platform. as the best stock of 2019 

Over the past month, Roku’s shares have undergone a correction, falling 3.. 

The question most long-time shareholders might be asking themselves is whether the latest correction will continue into February.

Or will the shares reverse course and move higher, ahead of Roku’s earnings which are due to be reported on Feb. 13? If I  could answer questions like that, I’d be a millionaire many times over. 

What I do know is that Roku remains an excellent long-term hold. Is it a buy at $129? I think it is. However, below $100, it would be a screaming buy. Here’s why. 

Four Corrections Since 2018

Since Jan. 1, 2018, Roku stock has experienced a 20% correction on four separate occasions: September-December 2018, March-April 2019, September 2019, and December 2019 to January 2020. 

After the first three pullbacks, Roku stock rebounded nicely. The rebound after the shares’ decline in September 2019 was the most impressive. On Sept. 9, they hit a 52-week high of $176.55. By September 27, the stock had fallen to $98.08, a 44% correction in just 14 days of trading. By the end of November, it had recovered almost all of its September losses. 

In my November 2019 article about the company, I suggested that investors interested in owning Roku wait for a better entry point. After the shares’ price-sales ratio had reached 19 (compared to less than 15 today), I thought the stock’s valuation had become stretched. 

While I wouldn’t say that Roku’s valuation is dirt cheap at the moment, the fact that its stock price has dropped by about 20% since the beginning of December does mean that the entry point has become more attractive.

If you already own Roku, I’d recommend waiting to see if it falls more before buying additional shares. 

For those who don’t own the company’s stock, but are thinking about buying it, here’s what you need to consider. 

First, over its past four earnings announcements, Roku’s earnings per share have deviated from analysts’ mean estimate  by an average of 53%. In Q3, analysts were expecting a 27-cent-per-share loss; Roku reported a 22-cent-per-share loss. The company raised its outlook for Q4 and FY19.

Roku expects full-year 2019 revenue of at least $1.1 billion, a net GAAP loss as low as $61 million, and an EBITDA profit, excluding some items, of $28 million to $33 million. If it delivers sales of $1.1 billion, it will have grown its sales 48% year over year, three percentage points higher than its YoY growth in fiscal 2018.

Roku initially estimated that its 2019 adjusted EBITDA would be between -$5 million and $5 million. If it brings in at least $28 million, it will have beaten its initial projection by 460%. 

That suggests its profitability is rising more quickly than it had previously expected.

Therefore, I would be shocked if Roku’s Q4 EPS is below the consensus estimate of -14 cents.

Be on the Lookout for These Metrics

Each quarter, I look for the average hours streamed per Roku account. If that metric rises, Roku’s stock should also climb. 

In Q3 of 2018, the average hours streamed increased 22.4% year-over-year to 318.9. Compared with Q2, the metric increased by 3.4%. As long as the average hours streamed per active account keeps rising versus the previous quarter, life is good for Roku and its shareholders. 

A third point is that its average revenue per user or ARPU, increased 7.2% in Q3 versus Q2. In Q2, its ARPU rose 10.5% versus Q1. As long as the metric increases at least 5% versus the previous quarter, the company is growing impressively.

I don’t think investors need to be concerned about the company’s  growth outlook because it plans to launch many more initiatives to increase its advertising revenue. 

But Roku’s valuation is worrisome. 

In May 2019, I suggested that Roku’s shares could reach $200 by May 2024. At the time, it was trading around $84. Having gotten to $177 in late November, it will likely reach $200 sometime in 2021. 

As for the rest of 2020, Roku’s stock has been known to drop by more than 20%. I think it’s possible that the shares could fall back to $100 by spring. If that happens, all investors ought to be buying the shares with both hands.

Under $100, Roku  a screaming buy.        

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.