On Monday, March 16, shares of Roku (ROKU 4.08%) cratered about 21.1%, along with much of the market. The stock market plunged by the highest percentage in a single day since 1987, overtaking last Thursday's ignominious record.
But while stock market futures are actually up -- at least as of this writing -- Roku stock was down still another 6.3% in after-hours trading. That adds insult to severe injury, with the stock now down roughly two-thirds since its all-time highs set back in August 2019.
The reason it's down is because apparently some large shareholders think Roku may have further to fall.
An big block offering
As reported by Bloomberg, after Monday's market close, Morgan Stanley (MS 1.43%) said that it was offering a large six million-share block of Roku stock between $57.50 and $59 to interested shareholders, below the closing price of $63.84. The sellers are apparently the giant private investment firms FMR LLC, or Fidelity Investments, and The Vanguard Group.
That means that these two investment firms are looking to get out of this stock, even after the huge plunge in price on Monday and over the past few weeks. And that's despite Roku often being touted as a solid business amid the COVID-19 scare, given the propensity for people to stream video at home while waiting out coronavirus.
Not necessarily a bad sign, but not a great one either
Of course, it's possible that these investment firms have unique reasons for needing to raise cash. They could have other financial obligations that need to be taken care of, which would require raising money. These firms may also see better opportunities in other beaten-down sectors of the market as well.
Some may say that Roku has already been beaten up. However, it's important to note that Roku is still very much a story-oriented stock with little valuation support. Currently, the stock trades at just under 7 times sales as of the end of trading. That seems cheap, based on Roku's torrid revenue growth of 49% last quarter.
Risks remain in spite of growth
Still, Roku is unprofitable, and about a third of its revenue comes from its devices, which it sells at basically break-even gross margins. The remainder of its revenue comes from its "platform" segment, which takes a cut of streaming subscriptions accessed through its operating system, as well as advertising revenues streamed on its platform. If only looking at Roku's 2019 platform revenue, the stock is currently trading at about 10 times 2019 platform sales. However, platform sales grew at an even more robust 78%.
That growth figure is what's really exciting, given the trend in cord-cutting and the switch to online streaming, where Roku acts as a "neutral" OS.
However, even in that high-growth segment, Roku's margins are compressing. Its platform costs of revenue increased an even greater 110% last year, which management attributed to, "higher advertising inventory acquisition costs, ad serving costs, content licensing fees and credit card processing fees... as well as an $8.9 million increase in allocated overhead primarily in advertising operations and content distribution operations driven by the growth of the platform business."
Management could, of course, eventually flatten these costs out as Roku scales. However, Roku isn't exactly immune from competition either, with Amazon (AMZN 1.74%), Comcast (CMCSA -0.30%), and even Facebook (META 1.14%) all coming out with their own players. While some think that Roku's neutral platform may insulate it from competition, that remains to be confirmed.
In a skeptical market, stocks like Roku get killed
Roku has high revenue growth, but also came into this crash with a very high valuation and uncertain profitability. Aside from the directly affected cyclical sectors, growth stocks like Roku can also get crushed in a downturn due to the uncertainty around future revenues and cash flows. That could be why the aforementioned investment firms want out of the stock today, even at today's depressed stock price.