Shares of Roku (ROKU 1.58%) were already having a bad year. The growth stock had lost over a third of its value in 2022 alone going into its fourth-quarter earnings report on Thursday afternoon.
But losses worsened in after-market hours yesterday as investors digested the company's fourth-quarter results, which featured a significant deceleration in growth and a forecast for even slower growth in Q1. The stock fell as much as 23% in after-hours trading on Thursday, putting shares at about $112, or 77% below the stock's 52-week high.
Ouch.
With such a steep sell-off, many investors are likely wondering: Is this a good time to buy shares of the streaming-TV platform specialist?
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Roku Earnings: What you should know
Roku's fourth-quarter revenue increased 33% year over year to $865.3 million. Not only was this worse than analysts' average forecast for revenue of $894 million, but it was below management's guidance for revenue to be between $885 million and $900 million.
"In Q4, there was a mix of strength and softness among different advertising verticals. Verticals like restaurants and travel had strong growth," explained Roku in its fourth-quarter shareholder letter, "while auto and CPG [consumer packaged goods] experienced supply chain disruptions that had a negative impact on their product availability and therefore led to Q4 softness in advertising spend."
For its first quarter of 2022, Roku said it expected revenue to increase just 25% year over year to $720 million. To explain this significant deceleration, management said it anticipated supply-chain disruptions to impact both sales of Roku-powered TVs and the advertising budgets of some negatively affected companies.
On the bright side, Roku said its current challenges should only be temporary. To this end, management guided for full-year revenue to grow 35% year over year.
An attractive valuation
After falling so sharply, Roku shares are starting to look quite compelling. Shares now trade at 65 times earnings -- not bad for a company that expects to grow its top line 35% year over year in 2022.
In addition, the company's net profit margin, or its net income as a percentage of sales, should increase over time, thanks to the scalability of its business model. If Roku can reward investors with both strong top-line growth and net profit margin expansion over the next five years, the stock's sell-off this week may look like a great buying opportunity in hindsight.
There are still significant risks
Investors shouldn't be too quick to make the growth stock a large position in their portfolios. Indeed, it may be wise to wait and watch for a few quarters to see how the company manages a few of its challenges. Namely, slowing active account and streaming hours growth rates could be a sign that competition is heating up.
Active accounts and streaming hours increased a respective 17% and 15% year over year in Q4. These rates were down from respective 23% and 21% growth in Q3, and respective 28% and 19% growth in Q2.
There's at least one other player in the streaming-TV platform space that's growing its active accounts faster than Roku. VIZIO (VZIO -0.28%) said in its third-quarter report that active accounts increased 35% year over year. (Of course, we don't know VIZIO's fourth-quarter active-account growth yet.) There could be others with faster growth than Roku, but not all of the company's competitors (Amazon, Apple, and Alphabet) publish these metrics.
Could Roku's positioning as the most popular streaming-TV platform in North America not be as much of a competitive advantage as investors had hoped? Or is this slowing growth (particularly in active accounts) primarily a function of supply-disrupted TV sales?
Overall, it may be wise for investors to hold off on buying Roku stock until they see more evidence of an enduring competitive advantage -- one strong enough to help the company sustain the rapid growth rates required for the stock to live up to its premium valuation.
