Should Investors Buy or Sell Roku Stock?

Roku (NASDAQ:ROKU) stock seems to have lost its force. The shares skyrocketed and returned over 300% in 2019. However, the stock is trading at a 41.1% discount from the 52-week high level of $176.55 on September 9. At Wednesday’s closing price of $103.96, the company’s market capitalization is $12.6 billion.

Roku stock fell about 6.19% on Wednesday. So far, the stock has declined over 22% since the beginning of the year. The stock has also fallen over 24% since the company reported its first-quarter results on May 7.

What dented Roku’s growth?

The coronavirus pandemic hit Roku’s growth momentum. The company’s growth halted as advertisers pulled back their spending amid economic uncertainty. Although the company benefited from higher engagement as consumers shifted from OTT (over-the-top) platforms to streaming services during the lockdown period, its advertising business suffered during the first quarter. More cancelations dented Roku’s advertising business. Also, the company expects its ad business to grow at a slower pace in the coming quarters.

Notably, Roku has also been dealing with profitability. In the first quarter, the company posted a loss of $0.45 per share, which met analysts’ estimates. The company has been posting losses for the past five quarters. Roku also expects to see an adjusted EBITDA loss for the year. The company faces high air freight costs since factories have reopened in China. Roku expects to keep spending more on air freight in the near term to meet the demand.

Analysts’ growth forecast

Analysts expect Roku’s sales to increase 25.7% year-over-year to $314.4 million in the second quarter. The company’s sales will likely rise by 32.4% to $1.5 billion in 2020 and 33.9% to $2.00 billion in 2021. Also, analysts expect the company to report an adjusted EPS of -$0.51 in the second quarter. Analysts also expect an adjusted EPS of -$1.70 and -$1.27 in 2020 and 2021, respectively.

Can Roku stock bounce back in 2020?

Notably, Roku has reported strong revenue growth in the past. The company’s revenues have risen by over 52% in 2019. In the first quarter, Roku’s revenues reached $321 million and beat analysts’ estimates. The company also added 2.9 million active accounts in the quarter, as expected. People used streaming services amid the lockdown. Roku’s active users grew 37% YoY and reached 39.8 million at the end of the first quarter. The company’s streaming hours also surged by 1.6 billion and totaled 13.2 billion hours in the quarter. Although a decline in the advertising business hurt Roku’s revenues in the quarter, I think that the company’s advertising business should pick up the pace after the economy returns to normal.

More people have been shifting to e-commerce platforms. As a result, Roku stock should rise again in 2020. The company has also started working with its retail partners and TV brands to meet the changing shopping behavior later in the year. The cord-cutting phenomenon and shift to streaming services should drive Roku stock in the long term. However, growing competition in the streaming space might hinder the company’s growth. Roku’s services compete with Apple TV+, Disney+, and others.

Analysts’ recommendation

Overall, analysts are bullish on Roku stock. Among the 21 analysts tracking the stock, 13 recommend a “buy,” six recommend a “hold,” and two recommend a “sell.” Analysts have an average target price of $131.91 for the stock.