A lot of investors were selling Roku (ROKU 1.59%) on Thursday. ARK Invest CEO, founder, and master stock picker Cathie Wood was buying.
Wood added shares of Roku to a pair of her exchange-traded funds (ETFs), and you have to go a long way back to find the last time that she was adding to her position of the streaming media pioneer for her high-growth ETFs.
You have to go back nearly three months, precisely -- all the way to May 12 -- to find the last time that ARK Invest was adding shares of Roku. Since then, she executed a dozen different sell transactions, lightening her load of Roku.
Why is she buying back in just as momentum was shuffling to the exit door? There's a method to her madness, and it smells like money.
Roku like a hurricane
Roku shares closed 4% lower on Thursday (trading down by as much 10% at one point) after the company posted disappointing second-quarter results. Revenue and earnings blew past expectations, and top-line guidance for the current quarter was also comfortably ahead of where the pros were perched. The stock was dinged on a grim bottom-line outlook that will linger through 2022.
Roku warned that supply chain constraints will eat into device and smart-TV sales, and increasing costs there will gnaw away at the margins on the hardware front. Its bread-and-butter platform revenue, which now accounts for 83% of the top-line mix (a business that more than doubled in size over the past year), is also facing some near-term headwinds. Operating expenses are moving higher on an uptick in costs related to head-count increases, product development, and sales & marketing.
After a blowout quarter on the bottom line, Roku expects to barely break even in the third quarter, with adjusted EBITDA falling sharply on a sequential basis. It's a bad look for a stock that was gaining momentum this summer the way it did during the second half of 2020.
Roku was an odd bird last year. Despite being an obvious pandemic play with folks spending so much time streaming at home, the stock actually declined through the first six months of last year. It would go on to nearly triple, up 185%, through the final six months of 2020.
Wood knows what she is doing. She has to know that the near-term slowdown on the supply end will be temporary. She invests in enough early-stage and disruptive growth stocks to know that sometimes you have to invest now to grow substantially later. Roku is increasing its spending on original content this year, which is something that will pay off in the future by making the leading platform even more distinctive and valuable.
Another knock in the report was a sequential dip in usage, but that's a logical reaction to an economy that started opening up in the springtime. Social calendars actually started to get put to work in recent months. Roku is still growing its audience. Active accounts have climbed 28% to a record 55.1 million over the past year.
Roku's report wasn't a perfect one, but there is no line item that will weigh on its near-term earnings that is expected to be a long-term concern. You can't fault the market for the stock moving lower on Thursday, but you also can't blame growth investors with a long-term investing horizon if they approach the report as a buying opportunity.