It's not difficult to find a reason to steer clear of Roku (NASDAQ: ROKU ) right now. Revenue growth is slowing, Comcast Corporation (NASDAQ: CMCSA ) is working on a competing product and Roku stock itself is struggling to pick itself up after taking a post-earnings tumble. The picture is anything but encouraging.
Yet, for intellectually honest investors who've played this game for a while, nothing about the 45% selloff from the stock's early October high is truly surprising, nor is it intimidating. If anything, it's inviting to trading veterans who don't mind buying when there's blood on the streets. Roku is a young company, and Roku stock is still a relatively fresh listing. It can take a while for the dust to settle, and for expectations to be adjusted.
To that end, while most retail investors have been dumping their shares, analysts - the pros that get paid to look past the cloud of dust - have remained conspicuously bullish on Roku.
There's a good reason.
Inevitable Slowdown for ROKU Stock
If you think all stocks reflect the underlying value the company they represent at any given time, think again. Most generally do, but many don't.
Roku stock has, since being listed in September of last year, spent the better part of its life in the "don't" category. Investors fell in love with the pace of its revenue growth and the fact that it was even able to beat the venerable Apple (NASDAQ: AAPL ) in terms of streaming-TV box market share, and for some reason the market assumed the company's strong double-digit sales growth could be maintained indefinitely.
Last quarter, platform revenue - licensing and ad sales - was up 74% year-over-year to $100 million , and overall revenue was up 39% . Problem: Both figures were notably weaker than the second quarter's progress, when platform sales grew 96% and company-wide revenue was up 57% year-over-year.
Worse, analysts had been modeling platform revenue of $103.2 million.
Even worse than that, the company doesn't expect sales growth to accelerate anytime soon. Roku is looking for revenue of between $255 million and $265 million for the quarter currently underway. That's, on average, a little better than the consensus outlook of $258.8 million. Still, a top line at the midpoint of that range would only be about 38% more than year-ago levels, marking yet-another slowdown.
The question most analysts are tacitly asking with their responses to the results and outlook is, what did you expect?
It's All Relative
It's not a terribly difficult idea to understand. The more revenue a company produces, the more difficult it becomes to maintain relative growth rates because the comparison/baseline figure is forever getting larger. Most companies go through it as some point.
That's where Roku is now, but it's not a reason to steer clear.
Wedbush analyst Michael Pachter explains "We continue to believe in Roku's growth potential and that the company will, in fact, reach profitability as early as next year. Therefore, we think the recent pullback in Roku's share price presents a compelling opportunity to build a position."
Pachter's price target on Roku stock remained at $65.
Pachter isn't the only fan though. William Blair's Ralph Schackar is also still on board with Roku, not lamenting the fact that growth has slowed relative to prior quarters, but celebrating that growth has remained robust despite tougher comps. Schackar cheers the combination of the facts that strong with streaming hours viewed accelerated to the tune of 63%, the number of active accounts was up 43% and that the average revenue per user was up 37% year-over-year.
KeyBanc's Evan Wingren agreed that the most important metrics to watch were ad revenue and the number of active accounts, noting that both showed improvement last quarter. Wingren reiterated his $81 Roku stock price target and "overweight" rating.
Conversely, there weren't any real concerns analysts wanted to pound the table about.
Looking Ahead for Roku Stock
None of this is to suggest analysts can't be wrong. There was a whole slew of analysts who were convinced GoPro (NASDAQ: GPRO ) was a game-changer. It has been nothing but a massive disappointment.
Roku isn't trying to create a whole new product category by itself though. The streaming TV market's path has been rather well mapped, even if the trail's not been blazed. There's no doubt that streaming TV is the future, and there's little doubt that Roku will be the company to continue leading the trailblazing.
The recent weakness is simply the effect of euphoric investors coming down off of their high now that the company has significant year-ago numbers to compare to. Shareholders have been a bit spooked, but take note of the fact that the level-headed analyst community doesn't see a problem. The consensus target is still around $68, more than 60% above the current price of Roku stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter , at @jbrumley.
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