Despite Roku, the streaming service and digital media company being a household name in the US and Canada, its shareholders are frowning at the significant slump in the stock prices that continues unabated. Roku (ROKU: NASDAQ) stock price peaked in July 2021 to nearly $500, which was almost double Roku’s stock price range. Then in early January, the stock fell to a fresh 52-week low as it lost nearly 60% from the peak value. Some experts believe that the soaring stock prices that the company enjoyed along with the massive growth of the subscriber base were a flash in the pan because of the pandemic. For them, the slide in share prices is an ongoing correction process, but here is the other group of experts who consider the fall from grace as a splendid opportunity to buy the company’s stock.
What the future holds for Roku stock?
As the Roku stock price hovers around the lower level amid the persisting trend of sliding further, the stock received a sell rating in early January from Atlantis Equities that recommended a selling price of $136. The slow growth potential until 2025 and the company losing market share in Europe were the reasons for awarding the sell rating.
On looking back, it seems that those who heeded the advice might have acted rightly as currently, the stock is trading at $112.46, down by 21% following the release of the company’s fourth-quarter earnings. With the ebbing of the coronavirus, the price of Roku stock that soared during the pandemic is now experiencing strong headwinds. Despite strong customer demand, supply chain shortages are causing an imbalance.
To decide if Roku stock is worth investing in, we need to consider what lies in store for the company in the short and long term.
Short-term pressure will remain
Instead of looking at the Roku stock chart that helps in historical stock analysis, you should focus on the company’s operations and consumer behavior to get some idea about what can happen in the short term. With the withdrawal of the Covid19 curbs and the reopening of economies, there will be a reduction in screen time as people will have less time for sitting in front of their TVs. The massive surge in consumers and viewing time during the pandemic was temporary no matter how long the pandemic lasted. As expected, the balloon is deflating as life returns to normal, and Roku does not hope for anything different. However, the slowing of customer growth is also temporary.
On the other hand, worldwide supply chain constraints prevent Roku from meeting the demand for TVs and players. The company suffered gross profit loss in three successive quarters due to poor sales of its devices. The losses in 2021 amounted to $6.7 million in Q2, $14.6 million in Q3, and the year-end losses in Q4 touched $45.9 million.
Since the management concentrated on consumer growth, it did not raise the prices of the devices. Despite adding more consumers, the operating income in Q4/2021 was $21.4 million against $65.2 million year-on-year for the same quarter. The negative impact will continue for a few more quarters till the easing of the supply chain constraints and stock price for Roku will remain at the lower level.
Long-term prospects are excellent
Roku’s excellent long-term prospects have remained intact. The trend of customers, both ‘cord-cutters’ and ‘cord-nevers’ is rapidly subscribing to streaming services, which are also seeing a rise in advertising as advertisers favor streaming media. It means that Roku stands to benefit immensely as a streaming content platform. In 2021, the company earned the top spot as a TV streaming platform in the US, Mexico, and Canada. Roku’s revenue stream consists of revenue-sharing agreements with third-party streamers and from showing advertisements that generated $750 billion in 2021 across the industry.
The company is maintaining its growth momentum in the long run. Although Roku’s stock price is crashing, the company has 60.1 million active users compared to only 27.1 million in 2018. The average revenue per user has gone up from $17.95 to $40.3 during the same period.
Although Roku stock will experience short-term volatility, it’s a good buy for long-term investors.
