Shares of Roku (NASDAQ: ROKU) fell 34.6% in the first half of 2024, according to data from S&P Global Market Intelligence. Just when you thought the media-streaming technology expert was on a roll, with a 125% price gain in 2023, the skeptics showed up in full force. What's going on?
Vizio deal sparked Roku's valuation panic
Roku's stock took a brief 10% dip in the middle of January, as retail giant Walmart entered the smart TV market by acquiring electronics maker Vizio. Roku critics saw this deal as negative news since Walmart's massive market reach should add millions of active users to Vizio's SmartCast operating system. Vizio currently runs Roku's platform on a couple of smart TV models, and the new owner would probably double down on the in-house solution instead.
More to the point, Walmart's best-selling store brand is an exclusive Roku user today and the retailer would love to replace that software with a solution from its own developers. So Roku may lose a significant number of software sales in the American market when the Vizio deal is complete.
That being said, Roku's stock recovered quickly from the Vizio-inspired price drop. It was already old news when the earnings report was due in the middle of February. And that's the key event in Roku's painful first half. The fourth-quarter earnings report was disappointing, as Roku met the average analyst's financial targets but didn't signal a strong recovery in the muted digital advertising business.
Furthermore, the $2.3 billion price Walmart is paying for Vizio works out to just 1.3 times the target company's annual sales, setting a low valuation standard for the smart TV industry. Roku's stock currently trades at 2.4 times sales, which is nearly twice the sales-based ratio of Vizio's deal.
Roku's stock price continued to slide after February's sharp plunge, despite another robust earnings report in May.
The forward view from Roku's couch
Roku was a richly valued superstar in the lockdown era of the COVID-19 pandemic, and that high-flying period is a distant memory today. The stock trades 87% below the peak of that digital entertainment frenzy, which will see its third anniversary later this month.
But Roku's business growth is back in full swing. Sales, free cash flows, and adjusted earnings pumped their brakes over the last couple of years but have all returned to positive trends in 2024. The active user count never even slowed down, adding 10 million streaming households in the last four quarters.
And the digital advertising industry is getting back on its feet after an inflation-driven downturn. I can't wait to see Roku's sales and earnings soar in a healthier economy, where ad buyers feel confident that their marketing budgets will make a difference to their own business results.
So I keep pounding the table about Roku's undervalued stock -- keep in mind that Vizio can't compete with Roku's high-octane growth -- and it's still a fantastic buy today. I'm not alone in this view, by the way. Famed growth investor Cathie Wood is doubling down on Roku's stock, too.
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Anders Bylund has positions in Roku. The Motley Fool has positions in and recommends 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.
