What happened
Shares of Roku (ROKU 0.24%) fell 64% in the first half of 2022, according to data from S&P Global Market Intelligence. The media-streaming technology expert's stock was tangled up in Wall Street's general retreat from high-flying growth stocks, accelerated by an underwhelming fourth-quarter earnings report.
So what
Roku reported disappointing fourth-quarter results in February, and the stock closed 22.3% lower the next day. In that business update, quarterly revenues rose by 33% year over year with large increases in customer counts, hours of viewer engagement, and gross profits. However, your average analyst was looking for 38% top-line growth and stronger profits.
That was the sharpest drop in a long string of volatile market gyrations. Many investors felt that richly valued growth stocks like Roku were overdue for a price correction in early 2022, due to galloping inflation metrics and lower consumer confidence in the economy.
And Roku's business actually has a tight connection to those scary inflation figures. At a time when many consumer-facing businesses are raising prices in order to protect their profits from rising operating expenses, Roku prefers to take the brunt of those higher costs instead. That's a customer-friendly approach that should result in deeper consumer loyalty and faster user growth over time, but at the cost of lower profits in the short term.
NASDAQ: ROKU
Key Data Points
Now what
Roku's downtrend actually started last summer as the stock chart peaked in July 2021. At the start of 2022, the stock had taken a 54% haircut but was still richly valued at 133 times adjusted earnings and 11.7 times sales. Today, Roku shares are trading 82% below those lofty all-time highs at 90 times earnings and 4.2 times sales.
To be clear, that's still far from deep-discount value territory. However, Roku is still a high-octane growth stock that derives its market value from short-term growth rates and long-term market prospects. The company holds a market-leading position in a streaming sector that will deliver tremendous global growth for years to come. Roku is also widening its horizons with original content production, an on-screen shopping service in partnership with Walmart (WMT 0.08%), international growth ambitions, and an evolving advertising operation. Against that backdrop, I see a fantastic buying opportunity even if the valuation ratios still look pricey.
Sometimes you get what you pay for, and this company is going places in the long run.
