Shares of streaming standout Roku (ROKU +0.05%) were cruising in 2024 but lost control and spun out when fourth-quarter earnings came out on Feb. 15. The stock price has fallen roughly 32% since the report's release.
Sudden drops that big can be unnerving, and it's fair to at least revisit the stock's investment thesis to look for something investors might have missed or some other reason to run far away. At the same time, the market could be acting irrationally, making Roku's drop a fantastic buying opportunity for long-term investors.
Which is it? There's reason to believe it's the latter. Here is what you need to know.
Why Roku may have dropped after earnings
Roku's Q4 revenue and earnings performance were up to Wall Street expectations. Revenue was $984 million, $17 million higher than expected. Roku's earnings per share of minus $0.55 met estimates. Roku did slip in monetization, where average revenue per user (ARPU) declined 4% year over year to $39.92.
Making less money on users is a potential red flag because Roku isn't yet profitable on a generally accepted accounting principles (GAAP) basis. The market could be taking this as a sign that Roku's long-term profitability is doubtful. But there is some important context that long-term investors need to know.
NASDAQ: ROKU
Key Data Points
Roku explained that it's expanding into emerging markets. Specifically, Roku noted in its Q4 shareholder letter that it's launching in Central America, including RCA Roku TV models in Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. It's also selling Roku TV models with Caixun in Chile. Roku's playbook is to accumulate market share and then monetize once established.
These metrics prove Roku is doing well
The company's user base and engagement will ultimately drive Roku's financial performance. That's where investors need to be looking. Fortunately, Roku turned in another strong performance here. Roku ended 2023 with 80 million active accounts, up 14% from 2022. Additionally, streaming hours were up 21% year over year in Q4, showing that users are spending more time on the platform.
This is important because Roku's platform segment, which houses its TV operating system software and advertising business, will drive Roku's earnings. The hardware sales have negative profit margins because they're designed to bring users on board. Platform revenue grew 13% year over year in Q4.
No, Roku isn't technically profitable today. However, Roku is still on excellent financial ground. The company generates free cash flow ($173 million over the past four quarters), has zero debt, and has $2 billion in cash on its balance sheet. It can continue to forego profits for growth because it can afford to. This may eventually make for a bigger and better Roku years from now and better long-term investment returns.
Roku is a no-brainer on this drop
If you value the stock based on Roku's revenue, it's trading near its lowest valuation as a public company. Does Roku seem like a business anywhere near dire straits? Again, all-time-high users, streaming hours, and revenue. The business is cash-flow positive and has a rock-solid balance sheet.
Investors shouldn't expect the stock to trade anywhere near 30 times sales as it did in 2020 and 2021 when Wall Street sent growth stocks into a euphoric frenzy. Still, Roku stock trading at even 5 times sales would represent doubling the current share price without factoring in future growth.
ROKU PS Ratio data by YCharts
That's a low bar to generate some great investment returns. Those are the types of fat pitches investors should be looking for. Even better, Roku's continued worldwide expansion gives the stock intriguing long-term potential, contrary to the picture Roku's recent share-price slide might paint.
