The streaming video powerhouse’s guidance appears to have left the market cold.
When a stock falls after a quarterly report, it can sometimes be a great buying opportunity. Those initial sell-offs can turn into overreactions, so if the company’s fundamentals remain strong, buying on the dip can lead to better returns later.
Streaming company Roku (ROKU 2.48%) posted its latest results last week, and the stock has fallen sharply since then. Prior to the third-quarter earnings report, it was hovering around $80, and last week, it closed at just under $66. Why have investors turned bearish on the streaming stock, and could this be a good time to add Roku to your portfolio?
Roku’s financials show improvement, but losses persist
The good news for Roku investors was that the company’s losses in the most recent quarter were not as bad as what analysts were expecting. Its net loss per share of $0.06 for the period ending Sept. 30 was considerably lower than the $0.32 loss that analysts were expecting. And for the past few quarters, Roku’s net loss has been improving and coming in better than Wall Street projections.
The bigger issue, however, is that the company’s guidance may not be all that impressive. It’s still expecting a loss for the current quarter and while revenue will rise to $1.1 billion, growing at a rate of around 16%, investors may not be thrilled with how the business will achieve that.
The company has two main segments: devices and platform. And Roku’s unprofitable devices segment is forecasted to expand by 25% while platform revenue (which generates strong gross profit margins) will rise by just 14%. If the platform segment grows at a far slower rate, that could result in a negative impact on Roku’s bottom line.
Is Roku a cheap stock to buy?
Given that Roku is not profitable right now and may not be for a while, a natural way to assess its value would be to check its price-to-sales (P/S) ratio. Currently, it’s around 2.5. That’s modest in comparison to what Roku has averaged over the past five years.
ROKU PS Ratio data by YCharts.
While the stock definitely looks a lot cheaper than what investors have paid for the business in the past, there are a couple of things to consider.
The first is that the past five years include the early stages of the pandemic, when Roku’s stock price surged as the company benefited from people spending much more time at home.
The second is that Roku’s business has evolved in recent years, with the company pivoting more toward smart devices and making its own TVs. While these strategies have helped grow its top line, my concern is that the path the business is now taking may not be the optimal one for it, given the lack of profitability in its devices segment.
Should you buy Roku stock today?
Roku is certainly a cheaper stock to buy today than it was a few weeks ago, but I believe it should be trading at even more of a discount given that it is not profitable and that its key growth segment — devices — may hinder rather than help its bottom line in the long run.
Beyond that, the possibility that Walmart may succeed in its attempt to buy connected TV company Vizio could create additional challenges for Roku. Given the headwinds it’s facing and the direction the business is going in, Roku isn’t a stock I’d rush out to buy right now.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku and Walmart. The Motley Fool has a disclosure policy.
