Please ensure Javascript is enabled for purposes of website accessibility

Is It Time to Buy Roku Stock?

By Daniel Sparks – Oct 23, 2021 at 9:05AM

Key Points

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Roku got caught up in a digital advertising stock sell-off on Friday. But was there merit to its decline?

Digital advertising stocks were slammed on Friday, following news that Snap (SNAP 7.26%) missed top-line expectations for its third quarter and provided a fourth-quarter revenue outlook below analysts' consensus view. Shares of Snapchat fell as much as 27%, and many other digital advertising stocks fell 5% or more.

One growth stock that was caught up in the sell-off that maybe shouldn't have been is connected TV platform company Roku (ROKU 7.32%). By the time the market closed on Friday, shares were down 3.6%.

Here's a closer look at what happened on Friday -- and why this could be a buying opportunity for investors interested in Roku stock.

Roku Channel displayed on a TV.

Roku Channel. Image source: Roku.

The Snap-induced sell-off

On Thursday afternoon, Snap said its third-quarter revenue grew 57% year over year to $1.07 billion. This was below the $1.10 billion the consensus analyst estimate called for. Even worse, however, was management's guidance for fourth-quarter revenue to be between $1.165 billion and $1.205 billion, translating to a year-over-year growth rate of just 30% based on the midpoint of this range. Analysts, on average, were expecting Snap to guide for fourth-quarter revenue of $1.36 billion.

Explaining the company's third-quarter revenue miss and its weak top-line outlook for the important holiday period, Snap said it was adversely impacted by changes to advertising tracking on iOS, and global supply chain challenges and labor shortages that are causing inventory issues for its marketing customers.

Some investors worry that these same challenges will impact other digital advertising companies like Roku.

Highlighting Roku's resilience

While Roku could definitely see some weakness related to the current global operating challenges facing its marketing partners, the streaming platform is largely exempt from challenges related to iOS. As a streaming TV platform, Roku users give the company their emails and are tracked and targeted through the company's own measuring tools. Further, streaming TV is seeing exceptional momentum as an advertising channel, evident by the fact that Roku more than doubled its monetized video ad impressions on its platform in its most recent quarter. 

As an advertising platform that isn't reliant on iOS, Roku may have even been a beneficiary of some spend that shifted away from content platforms like Snapchat, which are heavily reliant on iOS advertising tracking and measurement.

Given how connected TV is largely free from the ad-tracking challenges that Snap is facing, Roku stock's slide on Friday was arguably overdone. The decline, therefore, makes the stock even more attractive to investors who might have already been interested in buying shares of the fast-growing streaming-TV company.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Roku. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.