Shares of streaming-TV platform company Roku (ROKU 1.91%) have cratered recently. The stock is down about 60% from levels just five months ago. Ouch!
On Wall Street, however, sell-offs often translate to opportunity. Could this be one of those times? Has Roku's plummeting price gone too far, creating a good entry point for patient investors?
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Why Roku stock is down
Roku stock has recently come down significantly for a number of reasons, including:
- A pullback in many growth tech stocks like Roku
- Reduced active accounts compared to the first quarter of 2021
- Worse-than-expected third-quarter revenue
- Weaker-than-anticipated fourth-quarter revenue guidance
- A recent ruling in favor of Universal Electronics in a patent case against Roku
While these points may be a bit scary to anyone interested in investing in Roku, some sound worse than they really are. In addition, the stock's 60% decline could more than compensate for the risk these factors raise.
For instance, Roku's recent weakness in active account growth between the first and third quarters of 2021 should be viewed in the context of the extraordinary year Roku had in 2020, as many consumers looked for ways to stay entertained during their extended hours at home. In the third quarter of 2020, active accounts increased 3 million sequentially and nearly 14 million (43%) year over year. This pull-forward in demand, combined with the headwinds of more consumers spending time away from home amid a reopening economy and summer months, easily explains why the company is facing near-term active account growth headwinds. A challenging supply environment for TVs doesn't help, either.
Attractive fundamentals
Zooming out from these challenges and observing the company's general performance trends over the past year, there's good reason to believe this may be a great buying opportunity. For instance, while Roku missed analysts' third-quarter revenue forecasts, it's not like growth was slow. Roku's third-quarter revenue rose 51% year over year. Its platform revenue (primarily Roku's share of subscription and advertising sales on its platform), which accounts for more than 85% of its total revenue, increased 82% year over year.
Roku is also hitting a tipping point in its operating leverage -- its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is soaring even faster than revenue. Adjusted EBITDA in the third quarter of 2021 surged 132% year over year, climbing from $56.2 million in the year-ago period to $130 million.
Of course, there are risks Roku investors should be aware of. If competition intensifies, the company's long-term growth potential could become more uncertain. Further, management guided for a meaningful slowdown in its year-over-year revenue growth rate in Q4 as the company faces a tough year-ago comparison. If revenue growth continues decelerating, this could be a red flag.
Nevertheless, with the company's price-to-sales ratio now at about 11 (down from approximately 30 at the beginning of the year), Roku is worth a closer look as a potential stock for investors to add to their portfolio.
