Stocks to sell

Roku Stock Could Resume Its Downtrend After This Recent Bounce

Roku (NASDAQ:ROKU) is up 7% this week, but that might not be reason to believe its troubles are over.

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Before investors get too excited about a recovery, they should keep in mind that the Roku stock is down 60% over the past six months. It’s still down more than 45% year-to-date.

That shows just how far ROKU stock has fallen. The shares are currently 75% below the 52-week high of $490 they reached last July.

Roku has been brought low by a combination of slowing growth, poor financial results, supply chain disruptions and market volatility. While the shares have bounced off the bottom of $97.91 they hit on March 14, they still have a long way to go to meaningfully recover and even further to go to test new highs.

Short-Term Problems and Roku Stock

Roku’s management says that the company is suffering from two short-term problems. The first is that the number of hours people are spending streaming content on Roku devices continues to slow as the economy reopens.

The second short-term issue is that supply chain shortages have made it difficult for the company to deliver its internet-connected TV sets and other devices to customers. This has led to Roku reporting losses in three consecutive quarters and they appear to be growing.

Roku posted a loss of $6.7 million in last year’s second quarter, a $14.6 million Q3 loss and a loss of $45.9 million in Q4 2021. These losses have not inspired confidence.

Waning demand and declining sales led Roku’s income from operations to slump to just $21.4 million in last year’s fourth quarter from $65.2 million in the same period a year earlier.

Revenue grew by 33% year-over-year in the fourth quarter, compared with 51% growth in the third quarter and 81% in the second quarter of 2020. The slowing growth and accelerating losses have led many analysts to grumble aloud that Roku’s problems may not be as temporary as the company would like investors to believe.

The company also issued guidance for the current first quarter that was lower than what Wall Street had been expecting. ROKU stock fell 25% the day after its Q4 print.

Reason to Believe?

Despite the slowdown of the last year, Roku was still the top streaming platform in North America – number one in the U.S., Canada and Mexico. The company has grown significantly since it went public in September 2017.

Today, Roku has just over 60.1 million active accounts, up 122% from 27.1 million accounts back in 2018. Average revenue generated per user is now $41.03, which is an increase of 129% from $17.95 at the end of 2018.

This growth trajectory provides some hope for Roku’s long-term prospects should the company find a way to boost demand and overcome the supply chain problems that are hurting its ability to deliver for customers.

While the growth over the past five years has been encouraging, Roku remains a pricey stock even after its steep decline since last summer.

Today, ROKU stock trades at a price-to-earnings ratio (P/E) of 74, which is nearly triple the average technology stock’s P/E of 25. The company’s stock has gotten cheaper, but it is not yet cheap.

The high valuation puts Roku shares out of favor with investors who are now seeking out more affordable securities in an inflationary environment and as interest rates begin to rise. It could be that Roku’s stock has further to fall and may again dip below $100 a share.

Wait on ROKU Stock

A lot of questions remain when it comes to Roku and its stock.

True, the run higher in recent days is positive. The issue is whether the current rally is the start of a meaningful, long-term recovery or if it will prove to be a temporary, unsustainable bounce. Much will depend on Roku’s future earnings.

The company’s financial results will need to demonstrate that the company is able to manage and overcome its current challenges and get back on a path towards sustained growth and profits.

Failure to do that, and Roku’s share price is likely to remain depressed. As such, investors should avoid this company for now. ROKU stock is not a buy.

Disclosure: On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.