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Roku‘s (NASDAQ:ROKU) stock has had quite a rough couple of months. Despite reaching a new all-time high in July last year, shares have since been trashed. Over the past 12 months, this previously explosive growth stock has taken a nearly 60% hit.
So, what happened? And is this actually a buying opportunity for my portfolio?
A unique streaming platform
As a reminder, Roku is a streaming service similar to Netflix or Amazon Prime. But rather than primarily focusing on offering original content, the firm has ventured into the hardware space.
Using a Roku Player device, non-smart TV’s can gain access to almost all other streaming services through it. And the company even works directly with TV manufacturers to install the Roku platform as the operating system on these devices.
This strategy has enabled the group to remain competitive in an area where new streaming services are constantly popping up. And it’s resulted in revenues growing from $399m in 2016 to $1.78bn in 2020. That’s an average annualised growth rate of 45%!
Needless to say, that’s quite impressive. So seeing Roku’s stock have a stellar run over the years is hardly surprising. But if the company is thriving, why is the share price now on a downward trajectory?
Roku’s stock falls on fears of a slowdown
Like any high-growth stock, Roku’s valuation is pretty lofty. Even after the recent tumble, its price-to-earnings ratio sits around 80. In my experience, with such a high price tag, the level of volatility also tends to be elevated, especially when fears of a growth slowdown is on the rise.
In its latest earnings report, guidance for its final 2021 quarter fell below expectations. Management set its net revenue outlook at $893m, versus analyst forecasts of $944m. But even beyond missed targets, there could be looming issues in its international expansion.
To date, most of Roku’s success has originated from within the US. But with the market now close to saturation, management is having to look elsewhere to find new growth opportunities. And a recent report by Atlantic Equities suggests the group could struggle against rising competition from the likes of Samsung and LG Electronics.
With that in mind, I’m not surprised to see Roku’s stock take a hit.
Is this actually a buying opportunity?
Facing new challenges abroad is hardly unexpected, in my opinion. But even with this increasingly competitive environment, I believe Roku is in a strong position. Alphabet (Google) recently signed a new deal with the company to keep YouTube and YouTube TV on Roku’s platform.
Meanwhile, despite having its own streaming device business, Apple has also signed a partnership with the firm to add Apple TV to Roku’s technology.
To me, this looks like the work of a wide economic moat. As such, I think the falling Roku stock price is actually a buying opportunity for my portfolio.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Roku. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022