Roku’s [ROKU] share price started November trading at above $300, yet by close on 26 November it was priced at $235.16 - a substantial slump. One reason is that the stay-at-home plays so popular during the pandemic (think Zoom and Peloton) have seen declines after the easing of lockdown restrictions. Roku, which provides streaming devices, has similarly taken a hit as people do other things than stare at the box.
Yet Roku’s share price collapse could be a buying opportunity. At least that’s the view of Ark Investment’s Cathie Wood. The stock has plunged over 16% since 17 November in a selloff that’s being pinned on an analyst downgrade. During the worst of the falls Cathie Wood picked up more than 300,000 additional shares - a big act of faith for the supplier of digital television boxes.
Roku now represents almost 5% of the ARK Innovation ETF and nearly 4% of the ARK Next Generation Internet ETF. But, in a post-pandemic world, are streaming services not named Netflix [NFLX] bound to take a hit? Or, is the declining stock a ‘buy now’ opportunity for investors seeking long-term gains?
Roku’s share price hit by analyst cuts
On the face of it Roku’s share price is suffering as the pandemic’s coach potatoes return to the office or plonk for other forms of entertainment now available post-lockdown. Stay-at-home plays have taken a hit - whether that’s Peloton [PTON] getting thumped by reopening gyms or Zoom [ZM] not being quite as essential as workers now return to face-to-face meetings.
Analysts have taken note, cutting targets that were perhaps too optimistic in just how far the pandemic would change how we live longer-term. Michael Nathanson at MoffettNathanson chopped his target from $330 to $220 - a 6.3% downside on Friday’s close. Nathanson argues that Wall Street had gotten ahead of itself when it came to Roku.
Michael Nathonson's Roku price target, brought down from $330
To meet lofty analyst expectations, Nathanson believes that Roku will need to make money on ‘an absurdly high’ proportion of advertising impression for video on demand.
“While there is no doubt that advertising was a significant driver of Roku’s revenue upside, a material part of the company’s growth has come from third party SVOD-related revenue contributions, which are obviously set to slow,” Nathanson wrote before adding, “Simply put, we think our and the Street’s long-term revenue and earnings estimates are just too damn high.”
Where next for Roku’s share price?
Not helping things were Roku’s mixed third quarter numbers that came up short of expectations. In the quarter, Roku delivered earnings of $0.48 a share, beating a predicted $0.09 a share. Revenue came in at $680, missing the expected $684m. While revenue on its platform increased year-on-year, sales of its devices dropped a hefty 26% year-on-year. One silver lining was active accounts increasing 1.3m from the second quarter to come in at 56.4m, although this missed Wall Street’s predicted 56.7m.
“Looking ahead, our business fundamentals remain strong but we are mindful that the challenges created by the global supply chain disruptions will likely continue into 2022,” CEO Anthony Wood and Chief Financial Officer Steve Louden wrote in a shareholder letter. “These headwinds may have a broad impact on the holiday season in terms of consumer confidence, product pricing and availability, and advertising spend levels.”
“Headwinds may have a broad impact on the holiday season in terms of consumer confidence, product pricing and availability, and advertising spend levels” - Roku CEO Anthony Wood and CFO Steve Louden in a shareholder letter
Roku’s business is still growing, just not at the pace that Wall Street wants. And here’s where the problem lies. Overzealous predictions have pumped up Roku’s share price along with other stay-at-home plays.
Arguably, this has meant a correction in Roku’s share price. The question is now that some of the hype has subsided is the stock a buying opportunity. After all, Roku is the dominant player in its space. Cathie Wood thinks it is but investors might need another quarter of solid earnings before deciding to follow suit.