In hindsight, it’s clear investors during the 2020/2021 runaway bull market got carried away with Roku (NASDAQ:ROKU). As you may recall, ROKU stock traded for as much as $479.50 per share during this time.
Today, of course, the stock trades at a mere fraction of this high-water mark, yet even in the mid-$50s per share, Roku is hardly a bargain.
Roku’s user base may be growing. If/when the digital ad market makes a comeback, this is likely to translate into material revenue growth. However, when it comes to reaching consistent profitability, things get a lot murkier.
| ROKU | Roku | $52.64 |
What’s Holding ROKU Stock Back
After plunging during 2022, ROKU kicked off 2023 with a rapid move back to higher price levels. Starting off the year at around $40 per share, in mid-February it made a brief return to prices north of $70 per share.
ROKU stock is still up by more than 33% year-to-date, but in more recent months shares have slid back. Sure, more macro factors such as interest rates are playing a role.
As the Federal Reserve remains steadfast in its efforts to bring down inflation, hopes of “Fed pivot” on interest rates in 2023 have been dashed.
Still, what has really put pressure on shares over the past two months, and is currently holding them down, is Roku’s poor fiscal performance. This has really dampened bullishness for the stock. Macroeconomic changes have not affected Roku from growing its ad-supported streaming platform.
Last quarter, active users grew by 17% compared to the prior year’s quarter. However, revenue growth during this same period came in at only 1%.
Worse yet, Roku’s quarterly net losses have ballooned seven-fold year-over-year, with little indication that they will narrow/swing back to positive anytime soon.
Why Revenue Growth Won’t Save the Day
Sure, investors bullish on ROKU stock will counter that current growth headwinds are likely temporary. Once economic conditions normalize, the company’s revenue growth will get back well into the double-digits.
More-or-less, I agree that Roku’s growth isn’t likely to stay flatlined for long. Not only is the company continuing to grow its user base. Roku is also at work improving the monetization of its platform, as measured by revenue per user.
Yet while revenue growth could be back into the fast within a few quarters, don’t assume that this alone will save the day.
That is, if we assume that Roku fails to deliver earnings results in the coming years that are above and beyond current forecasts. Per the sell-side’s estimates losses per share are expected to come in at $3.04 and $1.86, respectively, during 2024 and 2025. And those estimates already factor in the aforementioned expected revenue growth.
Yes, this may represent big improvement from the expected $5.17 per share in losses this year, staying in the red will make it difficult for ROKU to grow, or even sustain, its valuation.
The Verdict
As Roku’s profitability challenges persist, shares will, at the very least, languish at or near present levels. The stock could even keep sliding lower, as investor patience keeps wearing thin due to continued losses. Having said all of this, don’t get me wrong. It is not as if Roku’s fate is fully sealed.
The company could still potentially provide some positive surprises from here. For instance, further cost cutting moves, such as Roku’s laying off of 6% of its workforce in March. New monetization initiatives may result in higher-than-expected revenue growth. Both are possible ways that the company could speed up its move out of the red.
Yet even as the story could change, if it does, it will change slowly. With this, consider it best to hold off buying ROKU stock. At least, until meaningful progress towards becoming profitable.
ROKU stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
