Earnings Look Key to the Story Behind Roku Stock
Like most growth stocks, Roku (NASDAQ:ROKU) is a “story” stock. So far the story has been good enough. Even after a recent sell-off, ROKU stock has more than quadrupled from its $14 IPO price in a little over a year.
The question ahead of Roku’s Q3 earnings report on Wednesday afternoon is whether the story is good enough going forward. ROKU stock trades at 10x revenue — with some 40% of that revenue coming from players, which appear to be unprofitable. I’ve long loved the Roku story myself, but I argued at $71 in September that it was time to sell. Even nearly 20% cheaper, valuation remains a concern.
It’s not the only concern facing the stock, either. And that sets up a potentially key earnings report on Wednesday.
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If Roku can strengthen its story and answer those concerns, ROKU stock can rally back to those $70-plus levels. But in this still-nervous market, any stumble can send the stock tumbling. It seems safest at the moment to step to the sidelines – and perhaps be prepared to move quickly on the news from the quarter.
A Look at Roku Earnings
From a fundamental standpoint, Roku seems to have plenty of room for an earnings beat on Wednesday. Consensus revenue estimates project 35.5% revenue growth — a strong figure, but much lower than the 57% Roku generated in a blowout second quarter. Analysts are projecting a net loss of 12 cents per share after Roku surprised the market by posting a small profit in Q2.
And it’s worth noting those same analysts are firmly behind Roku stock. The average target price of $68 still suggests roughly 20% upside. Needham and RBC have assigned bullish ratings in the last couple of weeks.
So strong numbers have the potential to move ROKU stock higher. And performance of late — particularly in the key platform revenue business — suggests Roku has a real shot of beating the Street and gaining more positive analyst commentary coming out of the report.
Will It Matter for ROKU Stock?
The question is whether a beat will be enough to move ROKU stock higher. Obviously, at 10x revenue, impressive growth already is priced in to some extent. Ignoring player revenue — which appears to provide minimal, if any, profit — ROKU trades at roughly 17x this year’s platform revenue.
That’s a figure among the highest in the market. It’s also a figure that sell-offs in other plays like Square (NYSE:SQ) and Shopify (NYSE:SHOP) suggest investors aren’t thrilled about paying at this point.
Even with the bounce in tech over the past few sessions, this remains a nervous market. And that leaves room for significant downside here. The options market on Friday was pricing in a 16% move in ROKU stock this week. Clearly, traders are positioning for a big move. Any weakness in the numbers means that big move likely will be downward. For ROKU to move in the opposite direction, however, it will need to add to the story here.
The Roku Story
When Roku went public, the bull case was reasonably obvious. Roku was a clear play on the streaming video space, which was poised for decades of growth. But there were concerns as well.
The first was competition. Roku was going head-to-head against giants like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) unit Google and Amazon.com (NASDAQ:AMZN). It seemed like those larger companies could undercut Roku on player pricing. And with their own streaming offerings, they could bundle hardware and software in a way that Roku couldn’t.
One key reason why Roku stock has soared has been that the company largely has answered those concerns. As Will Ashworth pointed out last month, Roku’s market share continues to increase, with Google dropping. Instead of competitors squeezing Roku out, analysts now argue the company could be the target of a bidding war among those rivals.
Roku also has expanded its addressable market. Advertising revenue has grown faster than expected, and the Roku Channel has become a revenue stream of its own. But in this market, Roku needs more. And I’m not sure it will have a new aspect of the story to share with the Q3 report.
There still are concerns here, after all. Valuation, as noted, still looks potentially stretched. Roku still gets essentially zero revenue from Netflix (NASDAQ:NFLX) or Google unit YouTube. And while Roku is taking market share, it has had to price accordingly, pressuring player gross margins.
I’m not sure Roku can answer those concerns just yet. And that leaves the stock in a potentially precarious position heading into earnings. Investors know the story here. They decided over the past few weeks to pay less for that story — ROKU at one point had dropped by one-third on no news.
For ROKU to jump out of earnings, either the story has to get better or investors have to get more aggressive. I’m not confident enough on either point ahead of the report — though I’m fascinated to see what Roku looks like after it.
As of this writing, Vince Martin has no positions in any securities mentioned.
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