Roku (ROKU 8.02%) shares have been climbing again since the stock went over a cliff back in late September. It's getting close to its 52-week high, and the danger for investors is that the stock could be headed for yet another correction. The stock is back to being heavily overvalued, and investors buying anything that's priced at nearly 40 times book value are going to be taking a big risk by doing so.
The stock was down after its latest earnings report
A few weeks ago, Roku released its Q3 results, which showed revenue of $261 million, coming in higher than the $256.9 million expected by analysts. It also raised its full-year guidance, projecting sales to hit $1.11 billion. That would be good enough for a year-over-year growth rate of 50% from the $743 million that Roku generated in sales in 2018. The problem for investors is that the company continues to pile on the losses.
With a net loss of $25.2 million in Q3, Roku incurred a loss that was nearly as big as all three previous quarters combined, which totaled $25.8 million. A significant increase in operating expenses was behind the poor results.
With the company looking to expand internationally, things could get even more costly for Roku, meaning these losses may only get worse, not better, in future periods. Roku's TV models are expected to be available in the U.K. by the end of next year. While that will generate a lot more sales for the company, it may not matter much if Roku isn't able to make significant progress toward breaking even.
...and then it rebounded again
The sell-off that took place after the company's earnings release proved to be short-lived. In the days after, the stock would again rise back up in price. What caused the renewed excitement in Roku is unclear.
Following earnings, the company also announced that its acquisition of DataXu had been completed. The deal for the software company was originally announced back in October. For $150 million in cash and stock, Roku expects the software to help generate a lot more growth for the company as DataXu helps marketers on the demand side of things better plan and buy video advertisements.
While these are good developments for the company, they aren't earth-shattering or, in the case of DataXu, even new. In short, there doesn't appear to be a strong reason for the stock to be up as much as it is, especially in light of a troubling earnings report that calls into question whether or not the company will post a profit anytime soon.
Why the stock could see another correction
Roku's valuation is through the roof, and its stock could be hit very hard by not only a recession, but any noticeable slowdown in sales. The stock was recently upgraded by Bank of America analysts who are expecting Black Friday sales to be very strong for Roku. The holiday season is an important one for Roku, and any slip-up or disappointment could spell disaster for the stock. It doesn't help that Roku's stock is as volatile as it is. Its swings in value have been much more volatile than the market's, and that puts it at a big risk for a correction if the bull run on Wall Street doesn't continue.
Year to date, Roku's stock is up around 380%, and while there's definitely a lot of excitement surrounding a company that's growing sales at a rate of 50%, investors are still paying a significant premium to own shares of the company. Whether you're looking at multiples of sales or book value, Roku is an extremely expensive stock to own today, and it may only be a matter of time before there's another decline.
Overall, Roku is a good company, but it just isn't worth its obscene valuation, and long-term investors should hold out for a big drop in price before considering investing in the stock.