Roku Earnings Preview: What’s in Store?

Headwinds are certainly being priced in right now for leading entertainment technology player Roku (ROKU). ROKU stock is now trading more than 67% below its 52 week high.

A handful of factors have contributed to sudden volatility in the market. However, the most pertinent issue for investors right now is a shift in the Federal Reserve’s monetary policy stance due to rising inflation.

Explicitly, increasing inflation is what is setting up central banks to hike benchmark interest rates, perhaps faster than expected. There are clear signals regarding an increase in fed fund rates by 0.5% at this upcoming meeting, resulting in surging bond yields.

Viewing such conditions, several growth stocks are getting hammered on Wall Street. Increasing interest rates makes borrowing more costly, which directly affects growth stocks. This is because these firms need capital to finance their expansion plans.

Additionally, growth stocks earn most of their cash flows far out into the future (many aren’t profitable today), a big problem when these cash flows are discounted by a higher rate into the present.

Is ROKU stock’s discount worth considering? Personally, I’m turning slightly bearish on this stock, given these macro headwinds. Difficult-to-value stocks with much of their future earnings priced into their valuation right now are likely to continue to get hit hard.

That said, let’s dive into what’s driving the price action of this stock right now.

What Can Be the Explanation Behind an Aggressive Sell-off?

As per Roku’s Q3 earnings, the company actually saw increased average revenue per user (ARPU) numbers and growth among active accounts. In normal times, these results might inspire serious buying activity among retail traders.

However, those earnings are old news. The company is set to report its Q4 earnings shortly, and investors appear to be wary of the user numbers Roku is set to report. That’s despite a rally related to strong earnings from Disney and its streaming platform providing a near-term boost last week.

What will this earnings report show? It’s hard to say. On the one hand, there’s a reopening thesis that’s hurting streaming stocks. On the other hand, perhaps consumers are hungry for more entertainment and want to spread out their options. We’ll see.

For now, investors appear to be focused on the macro environment, though I expect the next two weeks to be extra volatile for Roku as investors digest the company’s performance.

What’s in Store During This Earnings Call?

Fortunately, Roku still has time to make serious improvements to its core business. Whether we’ll see any indication of changes during the company’s earnings call is something of a mystery right now.

However, competitive pressures have been an issue for some time, surpassing demand for Roku’s services. We’ll see if the company’s digital media options are sticky or if this company is on the downturn from here.

Roku’s previous deals with television manufacturers have bolstered this company’s market share. However, the extent to which consumer spending picked up this past quarter is what many investors will watch. Consumer sentiment is nearing its Great Recession lows, something that’s hurt the outlook for this stock heading into its earnings as well.

There’s certainly strong growth potential for Roku if its advertising brand studio picks up steam. This division was launched to assist marketers in creating interactive video ads and short TV programs.

Further, in June, it rolled out Roku Recommends, a program that highlights trending movies and TV shows. How these programs perform is another key factor investors will be watching closely.

Ultimately, Roku’s financials don’t look too bad right now. As of the company’s most recent earnings report, the company had around $2.18 billion in cash on its balance sheet and less than $100 million in debt. How much cash was burned this past quarter and where the company chose to invest its capital are other key items to watch.

Wall Street’s Take

Turning to Wall Street, Roku comes in as a Moderate Buy. Out of 18 analyst ratings, there are 15 Buy recommendations and three Sell recommendations. 

The average Roku price target of $287.41 implies 82.2% upside potential. Analyst price targets range from a high of $400 per share to a low of $136 per share.

The Bottom Line on Roku

Ahead of earnings, Roku appears to be a difficult stock to assess. There are a number of factors investors will consider, and this is honestly one of the harder companies to value, based on the significant forward projections one is forced to make.

Thus, it’s likely many investors will remain on the sidelines prior to Roku’s earnings. After earnings, this stock could turn volatile quickly. Accordingly, investors should get their popcorn out — this should be a fun one to watch.

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