I did something recently that I only typically do when I'm checking out at a grocery store: I made an impulse purchase. In the closing minutes of trading on Thursday, with Roku (ROKU +2.26%) set to report fourth-quarter results later in the afternoon, I added to one of my largest positions.
I wasn't planning on growing my stake in the leading streaming TV platform. However, with the stock trading nearly 11% lower on the day, I figured it was worth a shot. It briefly dawned on me that maybe some more-connected investors knew it would be a bad report, but I didn't dwell on the theory. I've seen a lot of stocks move lower heading into a potentially problematic earnings report, only to come out flying after delivering blowout results.
Would my impulse purchase of a stock that I figured I knew well (and couldn't possibly head lower) pan out? Well, Friday wasn't exactly kind. The stock tumbled 22% following the report, as revenue fell woefully short of expectations and guidance proved problematic. Roku shares did climb 8% on Tuesday, but no one is going to call a decline of nearly 16% over two trading days a success. I'm down, but I've got time, so I'm definitely not out.
Image source: Getty Images.
Thinking outside the box
Roku had already painted a bleak portrait of how the next couple of quarters will go in its previous financial update. Its revenue guidance was disappointing that time, too, and investors were already told over the summer that supply chain constraints and rising input costs would eat into its bottom line.
Last week's report wound up being very similar to the third quarter, as Roku wound up surprising analysts with better-than-expected bottom-line results but flopped on trailing and forward revenue numbers. I still don't think the party is over, even though the stock is now (yikes!) 75% below last year's high.
NASDAQ: ROKU
Key Data Points
Volatility has come with the territory. Roku might seem like a steady performer in a no-brainer growing industry, but commanding nearly twice the market share of its nearest competitor isn't enough to smoothen the wild price swings. Roku has hit a new all-time high every year since going public five years ago.
- 2017: $58.80
- 2018: $77.57
- 2019: $176.55
- 2020: $363.44
- 2021: $490.76
It has gone on to correct sharply after every single peak. The current 75% drawdown is extreme, but every other annual high was followed by a decline between 43% and 61%.
This doesn't mean that history will reward Roku investors with a stock that quadruples from here at some point in 2022 to reach a new peak. Roku's sluggish revenue growth -- if you call 33% year-over-year top-line growth and guidance calling for a 25% increase in the current quarter "sluggish" -- will keep gains in check. The pandemic accelerated the migration to streaming services, but the market's growth has normalized now that folks are heading outside again.
The fourth quarter was rough for the popular streaming service stock. Player revenue declined during the seasonally potent holiday quarter for hardware sales. However, with active accounts, streaming hours, and average revenue per user all hitting new Roku records for the quarter, the report isn't a total failure. I was early in trying to time the bottom of Roku's slide, but riding out the volatility has historically been the best way to recover from an initial Roku entry point mistake.
