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Why Roku Stock Dropped Today

By Howard Smith – Aug 5, 2021 at 11:31AM

Key Points

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A strong earnings report wasn't enough to support Roku's high valuation.

What happened

Shares of Roku (ROKU 1.59%) are up more than 135% in the past 12 months due to robust growth in television streaming services, and its platform specifically. The company reported another strong quarter last night, but investors are looking at one item from the report that has the stock dropping today. As of 11 a.m. EDT, Roku shares were down almost 7% after dropping as much as 10% earlier in the trading session. 

So what

Roku reported net revenue jumped 81% versus the prior-year period, and platform revenue soared 117%. Average revenue per user (ARPU), an important metric for growth, also increased 46% year over year. And the company earned a profit of $0.52 per share, blowing past analyst estimates of $0.13 per share. So with all those positive results, why are investors selling?

A family sits on a couch. One of the children is holding a TV remote.

Image source: Getty Images.

Two things are at work to explain the negative reaction in the stock. First, Roku already trades at a high valuation, with a price-to-earnings ratio above 200 and a future price-to-sales ratio above 20, even considering a strong finish to the year. Second, the company reported that streaming hours decreased sequentially compared to the first quarter of 2021. 

Now what

While those streaming hours were still 19% higher than the year-ago period. Roku said the drop in streaming time versus the first quarter was due to "increased out-of-home entertainment activities (such as dining and travel) in Q2 as a result of pent-up demand and the loosening of COVID-19 restrictions." 

It seems inevitable that as the pandemic wanes, people will spend less time indoors watching television. But any stock that is at a lofty valuation doesn't typically have any room for even short-term negative news, explaining today's share drop. 

Howard Smith owns shares of Roku. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$60.73 (1.59%) $0.95

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