ROKU

Why Roku Stock Plunged 28% in February

Shares of video streaming company Roku (NASDAQ: ROKU) dropped 28% in February according to data provided by S&P Global Market Intelligence. Although it reported solid fourth-quarter and full-year results, it was negatively impacted by the news that Walmart is acquiring one of its competitors.

Making progress where it counts

Roku's fourth-quarter results were pretty strong. Revenue increased a solid 11% year over year, and both of its segments, platform and device, demonstrated growth.

There was good progress on profitability. Gross margin expanded by 2.5 percentage points to 44.5%, and operating expenses decreased 12% from last year. That led to a marked improvement in the operating loss, from $250 million last year to $104 million this year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned from a $95 million loss last year to positive $48 million this year.

What were probably the most important metrics, though, were viewership and accounts. Active accounts increased 14% year over year to 80 million, and streaming hours increased 21%. These numbers are important because they matter to advertisers, and advertisers are Roku's main revenue source. The platform business, which is mostly ad sales, accounted for 84% of the total in the fourth quarter. As Roku brings in viewers and adds hours, it can grab more ad sales.

The advertising industry is still feeling pressure due to the impact of inflation, but Roku is well positioned to capture great market share when it bounces back.

But there was some other news that, curiously, sent investors packing. Mega-retailer Walmart announced that it planned to acquire Vizio, which runs a platform similar to Roku, but on a smaller scale. The purpose of that acquisition is more to challenge, or keep up with, Amazon than Roku. But investors seemed to fear a Roku competitor getting support from Walmart's scale.

An opportunity to buy on the dip?

After the slide, Roku stock is trading at a price-to-sales ratio of 2.6. That's a great entry point for a stock demonstrating momentum and improving profitability.

I wouldn't call Roku stock a no-brainer; there's certainly risk with a company in the middle of challenging circumstances that's not profitable.

However, the current drop looks out of proportion to what Roku is demonstrating. Investors can feel confident about Roku's direction and prospects, and if you have some tolerance for risk, now looks like a good time to pick up some shares.

Should you invest $1,000 in Roku right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Roku, and Walmart. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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