Roku, Inc. (ROKU) operates a television streaming platform. Its streaming players and television-related audio devices are available across the United States through direct retail sales and licensing arrangements with service operators.

The company enables customers to discover and access various streaming content and content publishers to reach its user base of active accounts.

Since the beginning of the year, equities have witnessed a broad-based sell-off due to various macroeconomic and geopolitical factors. High-growth tech stocks have steeply declined due to the Fed’s aggressive interest rate hikes to tame the surging inflation.

In the last reported quarter, ROKU’s loss per share of $0.19 exceeded the Street estimate of $0.18. However, its revenue beat analyst estimates by 2.1%. Its platform revenue accounts for 88% of the overall sales.

While the platform revenue is growing, the company faces macro headwinds like the multi-decade high inflation, the ongoing war between Ukraine and Russia, and persistent supply chain disruptions.

Rising hardware costs led the player segment to report a negative gross margin of 17.4% in the last reported quarter. The company believes that its player gross margin and industry-wide TV unit sales might remain under pressure in the near term due to these headwinds. These headwinds can also lead to a reduction or delay in ad spending.

ROKU’s stock has declined 59.6% in price year-to-date and 78.6% over the past year to close the last trading session at $92.06. It is currently trading 81.2% below its 52-week high of $490.76, which it hit on July 27, 2021.

Here’s what could influence ROKU’s performance in the upcoming months:

Mixed Financials

ROKU’s active accounts increased 14% year-over-year to 61.30 million. Its Average Revenue Per Unit (ARPU) increased 34% year-over-year to $42.91. The company’s total net revenue increased 28% year-over-year to $733.70 million for the first quarter ended March 31, 2022.

However, its total operating expenses increased 55% year-over-year to $388.30 million. Its adjusted EBITDA declined 54% year-over-year to $57.60 million. Also, its loss from operations came in at $23.50 million, compared to income from operations of $75.80 million in the year-ago period.

Mixed Analyst Estimates

Analysts expect ROKU’s EPS for fiscal 2022 and 2023 to remain negative. However, its revenues for fiscal 2022 and 2023 are expected to increase 33.8% and 29.1% year-over-year to $3.70 billion and $4.78 billion, respectively.

Stretched Valuation

In terms of forward EV/S, ROKU’s 2.63x is 35.4% higher than the 1.95x industry average. Likewise, its 60.39x forward EV/EBITDA is 638.9% higher than the 8.17x industry average. And the stock’s 4.18x forward P/B is 121.3% higher than the 1.89x industry average.

Lower-than-industry Profitability

ROKU’s 4.78% trailing-12-month net income margin is 2.2% lower than the 4.89% industry average. Likewise, its 4.86% trailing-12-month EBIT margin is 48.2% lower than the 9.39% industry average. Furthermore, the stock’s 10.80% trailing-12-month EBITDA margin is 45.1% lower than the industry average of 19.70%.

POWR Ratings Reflect Bleak Prospects

ROKU has an overall D rating, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ROKU has a D grade for Value, in sync with its 3.08x forward P/S, which is 138.8% higher than the 1.29x industry average.

It has a D grade for Stability, consistent with its 1.93 beta.

ROKU is ranked #54 out of 60 stocks in the Consumer Goods industry. Click here to access ROKU’s ratings for Growth, Momentum, Sentiment, and Quality.

Bottom Line

Growth stocks that commanded high valuations in the recovery period last year have come crashing due to the Federal Reserve’s aggressive interest rate hikes. Even after declining 59.6% year-to-date, ROKU is trading at a stretched valuation.

Also, its profitability is lower than its peers. Due to the macro headwinds, the company’s margins may take a hit. Thus, it could be wise to avoid the stock.

How Does Roku, Inc. (ROKU) Stack Up Against Its Peers?

ROKU has an overall POWR Rating of D, equating to a Sell rating. Therefore, one might want to consider investing in other Consumer Goods stocks with an A (Strong Buy) and B (Buy) rating, such as Mannatech, Incorporated (MTEX), Ennis, Inc. (EBF), and Levi Strauss & Co. (LEVI).

ROKU shares were unchanged in after-hours trading Wednesday. Year-to-date, ROKU has declined -61.21%, versus a -18.71% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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