What happened
Shares of Roku, Inc. (ROKU +2.91%) were falling in tandem with the market sell-off today as high-priced tech stocks like the video-streaming specialist got especially hammered. Rising treasury rates sent shivers through the market as higher interest rates can mean that it's harder for businesses and consumers to borrow, they can slow down economic growth, and they can also make bonds more attractive than stocks. That development sent shares of the S&P 500 down 2.1% and pushed the Nasdaq down 2.6%. Though there was no major news out on Roku during the trading day, that pressure in the broader market was enough to push its shares down 11.5% as of 2:49 p.m. EDT.
Image source: Roku.
So what
Just a few days ago, research firm Wedbush initiated coverage on Roku with a neutral rating, though analyst Michael Pachter said the streamer was "priced to perfection." Such stocks are often the first to crash in the market sell-off as Roku lacks any underlying profits to support its valuation, and the stock has already run up considerably since its IPO last year. Debuting at a price of just $14 last September, Roku is still up more than 300% since then, as revenue growth has accelerated and the company has consistently beaten earnings estimates. However, the market seemed to sense that the stock was already overheated before today's sell-off as the stock peaked at an intraday high of $77.57 on October 1. Shares are now down more than 25% since then.
Now what
Though a double-digit sell-off is never easy for shareholders to stomach, today's slide shouldn't affect anyone's underlying investing thesis. In fact, the lower price arguably makes Roku stock more attractive for new money. However, investors should be prepared for a continued slide if the market continues to compress. After all, this is a company with no profits that still trades at a price-to-sales ratio of 10.
If you believe in the long-term potential of the company's platform business, which should eventually drive meaningful profits, then there's no need to fret about today's sell-off. Still, investors should be ready for more volatility ahead.
