Roku (ROKU -3.53%) has had a rough experience since the economic reopening gained momentum. The streaming enabler thrived in the early stages of the pandemic as demand for in-home entertainment exploded.
Now that entertainment options away from home are opening up, and billions of people have been vaccinated against COVID-19, in-home entertainment is not as highly desired. As a result, Roku's stock has crashed by more than 82% off its high. So, unsurprisingly, some investors ask if it's an excellent time to buy Roku stock.
Roku's headwind is short-term while its tailwind is long-lasting.
Interestingly, the long-running structural tailwind Roku has been riding to success was not altered by the pandemic. Streaming content is more convenient than cable. Streaming subscriptions can be taken anywhere you can get internet. Meanwhile, the cable subscription can only be accessed at home or in other places with a professionally installed cable connection. To make matters worse for cable, to compensate for the expensive installation process, cable companies force customers into long-term contracts. This fundamental advantage is unlikely to reverse and could fuel growth for Roku for several years.
Sure, demand for its players and TVs with its platform spiked when a potentially deadly virus was circulating. But Roku was growing revenue briskly even before the outbreak. From 2015 to 2019, Roku's sales increased from $320 million to $1.1 billion. Then it rose from $1.1 billion in 2019 to $2.8 billion in 2021. Roku is by no means solely a pandemic stock.
Roku sells players that connect to TVs and connects people to the Roku TV operating system. From here, folks can subscribe to streaming services or watch the freely accessible Roku TV channel. When folks sign up for Netflix (NFLX 3.17%) through the Roku operating system, Roku earns a commission from the transaction. Similarly, it earns a percentage when viewers are shown advertising while watching media through the Roku operating system.
Roku disaggregates its results into two segments the player and platform. The latter is substantially more profitable. In its most recent quarter, the platform segment generated $380 million in gross profit on $647 million in revenue. For that reason, Roku is willing to sell its players at thin or negative profit margins to get folks hooked on the Roku platform.
That's precisely what's been happening lately. Supply chain shortages have increased costs for Roku, so it has earned a negative gross profit in its player segment for four consecutive quarters. Management expects these headwinds to persist for the foreseeable future.
Roku's stock is too expensive, despite the excellent prospects.
ROKU PE Ratio data by YCharts
Even after falling considerably off its highs, Roku's stock is trading at a price to earnings of 87.6. While that may be near the lowest it has sold for in the last three years, it is expensive in absolute terms. What's more, the near-term headwinds facing the player segment could pressure profits for several quarters. Investors would be prudent to wait for a further pullback in the share price or for the headwinds facing the player segment to abate before buying Roku stock.
