Roku's (ROKU +0.96%) stock was down 21% on the day following the release of its fourth-quarter earnings. Roku has been down 68% in the last six months, looking back a bit further. The company thrived at the pandemic's onset while millions of folks were stuck at home and streaming content became a more popular pastime.
As economies reopen, the coronavirus pandemic goes from a tailwind to a headwind for Roku. Customer demand remains high while supply-chain shortages are creating an imbalance. Let's consider the company's short-term troubles along with its long-term prospects and determine if the stock is a buy right now.
Image source: Getty Images.
Short-term pressure will persist
On the one hand, it was to be expected that folks would spend less time streaming content as they got vaccinated against COVID-19 and economies started reopening. The surge at the pandemic's onset was always temporary, whether it lasted one month, one year, or three years. It's no detriment to Roku or its management now that the boom is reversing. It would be another story if it made decisions and significant investments with the expectation that the extraordinary demand would last forever as Peloton seems to have done.
Slowing customer demand is not its only short-term problem. Supply-chain shortages worldwide are challenging Roku's ability to serve existing customers who are interested in buying players and TVs. Due to rising costs, Roku has suffered a gross profit loss in three consecutive quarters from selling its player units. It lost $6.7 million in the second quarter of 2021 and $14.6 million in the third quarter, culminating in a loss of $45.9 million in the fourth quarter.
Management prioritized customer growth, so it did not raise prices for its players and instead absorbed the losses. Undoubtedly, that has helped Roku add nearly nine million active accounts in the last year. The other side of that coin is that Roku's income from operations fell to $21.4 million in Q4 2021 from $65.2 million in the same quarter of 2020.
Roku expects the impacts of supply-chain shortages to negatively impact the business over at least the next few quarters.
Roku's excellent long-term prospects remain intact
Looking at Roku's troubles in the near term, it's easy to forget its excellent long-term prospects. Consumers worldwide are moving to stream content instead of watching over linear TV. The overarching trend benefits Roku as a streaming content platform. Nearly every significant studio now has a flagship streaming service, and most are spending billions of dollars to beef up content for those services.
In 2021, Roku was the No. 1 TV streaming platform in the U.S., Canada, and Mexico. In addition to revenue-sharing agreements with streaming services, Roku derives revenue from showing advertisements, an industry that generated over $750 billion in sales last year.
And even though folks are increasing the time spent streaming content, advertising budgets have still not accounted for the shift in consumer behavior, a potential tailwind for Roku over the next few years.
NASDAQ: ROKU
Key Data Points
Is Roku stock a buy right now?
Roku's stock price crash has it selling at a price-to-sales ratio of 6.1, near the lowest level since 2018. Since then, the business has made considerable improvements.
For instance, at the end of Q4 2018, Roku had just 27.1 million active accounts. As of Dec. 31, Roku boasted 60.1 million active accounts. What's more, Roku is generating more per user. As of Dec. 31, Roku's average revenue per user was $41.03. At the end of 2018, that was $17.95.
While the near-term may remain volatile, Roku's stock is an excellent buy for long-term investors.
