Redfin (NASDAQ: RDFN) and Roku (NASDAQ:ROKU), each of which is down significantly from 52-week highs, are set to report Q4 2021 earnings after the closing bell on Thursday, Feb. 17. Here are the reasons that both stocks shouldn't be left for dead just yet.
After competitor Zillow (NASDAQ:ZG) (NASDAQ:Z) announced plans to get out of the iBuying business market, Redfin's stock dropped by more than 40% in just a few months and is 65% off its 52-week highs. Most investors assumed that if Zillow couldn't figure out how to make money, certainly its smaller competitor Redfin couldn't, either. However, there's more than meets the eye and Redfin may have been unfairly being lumped together with its struggling counterpart.
Unlike Zillow, Redfin is sticking with its iBuying business for now, despite its measly gross margin of 1.2% in the first nine months of 2021, Redfin has shown discipline compared to Zillow -- which lost $888 million with iBuying in 2021. Redfin CEO Glenn Kelman says the company uses "two layers of human governance." The result slows down the iBuying process but helps Redfin be more cautious with its inventory, meaning the company doesn't blindly follow algorithms. This played out in the numbers: Redfin only purchased 388 homes in its most recent reported quarter, compared to Zillow's 9,680 homes in Q3 2021.
Still, the question remains: if Zillow was unable to scale its iBuying business, how will Redfin? The company may not be able to -- which seems just fine with its CEO. "It's part of what we do, but it's not who we are," Kellman said on Redfin's most recent conference call. Now that Zillow is out of iBuying, Redfin is something its biggest competitor is not: a full-service real estate brokerage. As a result, Redfin could see an uptick in traffic to its site, which generates revenue for its real estate services -- a segment that had much better gross margins of 37% in its most recent quarter. Furthermore, Redfin plans on adding rental listings in March 2022, as it moves toward its ultimate goal: becoming a one-stop-shop for all things real estate.
For Redfin, iBuying isn't likely to be the end-all-be-all. Look to its upcoming earnings report for growth in traffic to its site and its real estate services revenue. If Redfin is able to maintain its modest gross margins in iBuying while growing its services business, expect a buyer's market for the stock.
Roku's stock is down a whopping 67% from its 52-week high in July 2021. Yet its fundamentals are as strong as ever. The streaming hardware leader is on pace to post record revenue and average revenue per user (ARPU) in 2021.
Roku has 56.4 million active accounts, up 21% year over year, and has an ARPU of $40 (on a trailing 12-month basis), up 49% year over year. With consumers continuing to drop traditional TV in favor of streaming, Roku is uniquely positioned to continue its growth. Roku considers itself an "ecosystem" where consumers, advertisers, and content publishers converge. All of that equates to impressive revenue growth. In Q3 2021, Roku's revenue reached $680 million, a 51% year-over-year increase.
As the company moves away from hardware that plugs into your TV, toward ad-revenue-sharing partnerships that put its software inside your set, its gross margins improve as well. In its latest quarter, Roku had a gross margin of 54%, up nearly 6% year over year. With impressive margins and revenue growth, Roku has been able to establish a healthy balance sheet with roughly $2.2 billion in cash and cash equivalents and only $520 million in total debt. As a result, Roku could continue to expand its content offerings as a way to grow its user base -- the company already purchased the library of the failed streaming company Quibi for less than $100 million in early 2021. More exclusive content could help improve its value proposition for consumers and advertisers. While Roku doesn't give exact figures for its advertising business, the company claims monetized video ad impressions have nearly doubled from Q3 2020.
Yet Roku isn't without its risks. Like most consumer goods companies, supply chain disruptions have caused headaches for Roku. According to management, overall U.S. TV sales in Q3 fell below pre-COVID 2019 levels, and TV prices increased 42% year over year. When one of Roku's major goals is to obtain new active accounts, TV sales become instrumental to growth. If supply chain and inflation issues aren't solved soon, active accounts could become stagnant, making Roku less appealing to advertisers.
Furthermore, Roku faces competition with much deeper pockets in the likes of Amazon.com (NASDAQ:AMZN) and Apple. As of September 2021, Amazon has started selling its own line of Smart TVs with its ecosystem integrated -- whereas Roku relies fully on partnerships with TV makers. By selling its own smart TVs, Amazon partially spares itself from paying Roku to carry its Amazon Prime streaming channel, eating into Roku's reoccurring revenue. Still, the Roku Operating System was the best-selling smart TV OS in the U.S. from at least early January to early December 2021 according to NPD, a retail analytics leader that tracks weekly sales, suggesting that rivals like Amazon have a lot of catching up to do to erode Roku's dominance.
For Roku, look to its upcoming earnings call on Feb. 17 for updates on the supply chain of Smart TVs and whether the company was able to continue to grow its active accounts and ARPU. If the company finds success in those areas, don't be surprised if the script flips on Roku's stock.
The Foolish bottom line
Being relatively young growth stocks, Redfin and Roku are prone to more volatility than established bellwether stocks. Investors need patience with these types of companies. If Roku and Redfin can deliver on their lofty goals, there's a good chance they may not only regain their lost value, but surpass it.