Since reaching over $170 a share early in September, Roku (NASDAQ:ROKU) has fallen hard over the past three weeks, dropping more than 41% to under $100 on Friday. It's been a colossal drop for a company that looked like it could do no wrong this year, especially after an impressive earnings beat in its most recent quarter.

Why all the panic?

In early September, Roku was trading at all-time highs and looking unstoppable -- until news came out that Apple would be launching its own TV service, expected to launch around the same time that Walt Disney is set to make its own Disney+ subscription available. And at a price of just $4.99 per month, Apple is undercutting the competition. Then, if that wasn't bad enough, there was news that Comcast would also be launching a streaming service in early 2020. A few days later, analysts from Pivotal Research began coverage of Roku and gave it a sell rating, which prompted yet another drop in price.

The sheer amount of streaming news lately has definitely made investors think twice about Roku, especially given that the stock had risen a mammoth 394% during the first eight months of the year.

Remote control being used to make a selection on a TV screen

IMAGE SOURCE: GETTY IMAGES

Have the markets overreacted?

The arena is definitely getting crowded when it comes to streaming. And as hardware options proliferate, it will be tougher for Roku to remain competitive -- especially when consumers can get free devices from services like Comcast. That may make it tough to sell them Roku devices, which can go for around $100 depending on the model.

However, even with Alphabet's Chromecast and Amazon's Fire TV, Roku has been able not only to stay competitive but to do extremely well. In the company's last earnings report, its number of active users reached 30.5 million. That's a growth rate of 39% year over year.

And as more segregation takes place with companies setting up their own services, Roku could be a great way to integrate them all on one device. In its most recent shareholder letter, the company stated that "Roku TV represented more than one-in-three smart TVs sold in the U.S. during the first half of the year."

That's a testament to the company's strong brand and the preference that consumers have for its products and services. The simplicity and ease of use of Roku devices have won over many users. So investors shouldn't count out the stock just yet: Despite the recent news, Roku isn't suddenly a company in trouble.

Key takeaways

Roku was a very expensive stock before this September decline, so it's not surprising that it fell in price (if perhaps not this much or this quickly). The reasons for the fall are what's surprising. The news surrounding the sell-off suggests investors are concerned with the company's potential growth, which shouldn't be a big concern just yet. With sales still going strong, it's premature to assume Roku is headed for tougher times.

That being said, the stock's ascent has been steep this year. The problem is that, even today, shares trade at around 13 times sales. It's hard to justify such a premium when investors are realizing just how small a competitive advantage the company has.

Despite the significant drop in value, Roku is still not a good buy, even at $100. Investors may want to wait for more of a decline before buying shares, as this sell-off has simply undone the most recent rally in August when Roku beat earnings. This is a painful reminder of how dangerous growth stocks can be, and how quickly they can see significant corrections.