Roku (ROKU +2.91%) has become an enigma. Logically, it seems like COVID-19 would have boosted Roku stock as millions of newly unemployed workers turned to low-cost streaming services to pass the time.
However, Roku stock moved lower at the height of the pandemic, and it has not returned to levels it saw in February. Nor has it broken the downtrend that began in September 2019. At that point, this consumer discretionary stock began a volatile downward trend that remains today.
Given Roku's behavior, investors may want to evaluate the stock's weaknesses and strengths before deciding whether to buy.
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The case against Roku stock
Despite the potential for the company, Roku stock brings with it significant negatives. For one, investors seem to pay little attention to the company's competitive position. For all of the hype around Roku, those who want to stream media to their televisions do not need this company. Old DVD players, game consoles, or competing products such as the fire TV stick from Amazon or Apple's Apple TV are among the many consumer choices for streaming media. At least from a hardware perspective, Roku does not have a competitive moat.
Moreover, like Netflix, Roku stock plunged along with the general market in February and March. Though it staged a dramatic recovery in April, the stock fell again without returning to its February 2020 high.
Also, like many popular stocks in new tech niches, it remains overvalued. For now, Roku trades at about 9.9 times sales. Although that comes in substantially lower than the 15.2 average price-to-sales (P/S) ratio for 2019, the average S&P 500 company sells for only around 2.3 times sales.
Furthermore, analysts expect losses to continue mounting. Consensus forecasts place losses at $1.70 per share for the current fiscal year, and no analyst predicts a profit through 2022.
Why investors should still consider Roku stock
Despite these disadvantages, investors can find reasons to buy. For one, Roku's position as an advertising platform creates a lucrative revenue source where one might not otherwise exist. Also, despite the existence of the Roku Channel, its relative lack of connection to a specific streaming service makes it largely a neutral player, unlike the Fire Stick or Apple TV box.
The Roku Channel went a long way in boosting its offering as an ad platform. Roku has grown viewership faster than the overall streaming market. Viewing hours on the platform increased by 38% year over year, while streaming hours rose by more than 100% for the Roku Channel over the same period.
Also, from a valuation perspective, the high P/S ratio makes it an expensive stock by most standards. That said, Roku is hardly the most overvalued stock in tech. The history of tech stocks has shown that some stocks like Roku go on to become profitable and prosper for years to come despite elevated sales multiples.
Moreover, revenue continues to improve. Analysts project revenue growth of 32.4% this year and 34% in fiscal 2021. Furthermore, after this year, Wall Street believes the company will pare its losses. Analysts forecast profit growth of 25.3% in 2021.
Additionally, Roku stock has established a history of generally moving higher. Despite falling in the last four months of 2019, the stock still quadrupled in value during that year. Also, the company opened trading in September 2017 at $15.78 per share. The current price of just under $113 per share means the stock has risen by roughly sevenfold in its 33 months of trading.
Should I buy Roku stock?
Roku is a buy, but perhaps not yet.
I think the overriding factor is the business. Roku continues to stay ahead of its very powerful competitors. Moreover, advertising not only drives revenue, but it also makes it a comparatively neutral platform for the streaming industry. While other companies could enter streaming, they would struggle to build the relationships and ad revenue that make Roku so compelling.
Still, investors may want to wait. Stocks that trend lower tend to continue dropping. Until a catalyst appears, that drop will likely continue. Investors should not try to fight the tape.
However, long term, Roku stock should benefit as more consumers and advertisers turn to its streaming platform.
