All eyes are on streaming platform Roku (NASDAQ:ROKU) stock ahead of its earnings report at today’s close (Feb. 17).
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It’s been a tough time for Roku shareholders since the company’s last results were released in November.
Since that time, ROKU stock has fallen around 50% to now trade around $161 a share. That’s nearly 70% lower than its July 2021 52-week high of $490.76.
Slowing growth of Roku’s streaming service coming out of the pandemic, combined with slower growth at competitors such as Netflix (NASDAQ:NFLX), has turned sentiment negative. However, despite the carnage over the last eight months, there is reason for cautious optimism heading into the company’s new earnings report.
A Closer Look at ROKU Stock
Citigroup (NYSE:C) recently maintained its “buy” rating on ROKU stock and a $275 price target, which would be about 75% higher than where the shares are currently changing hands.
In its analysis, Citigroup said that it believes subscriber growth at Roku will continue to be strong through 2023 as the streaming industry matures and economies of scale improve.
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Citigroup also sees Roku benefitting from raising prices for its streaming services throughout this year. Roku has indicated that it plans to raise prices, and that could help the company’s profitability going forward.
Deutsche Bank (NYSE:DB) also recently maintained its “buy” rating on Roku stock with a price target on the shares of $300, which would be 89% higher than current levels. In its analysis, Deutsche Bank said the selloff in Roku stock is “overdone.”
However, Roku faces some tough comparisons in its upcoming fourth quarter report. Expectations are running high given the final three months of 2020. You may recall that’s when the number of hours streamed on its internet-connected devices rose 55% and its number of active user accounts increased 39%.
Beating, or even matching the growth that occurred at the depths of the global pandemic, will be a tall order for the company.
Roku could impress by announcing that its average revenue per user and overall profitability has continued to grow.
Indeed, while Roku reported that its streaming growth slowed in Q3 of last year, the company did report that its overall revenue rose by 51% to $680 million, driven by growth in average revenue per user.
Supply Chain Issues
Another key metric analysts will be looking for in Roku’s Q4 print is the ongoing impact that supply chain snarls are having on its hardware business.
The company cited global supply chain problems as negatively affecting the manufacturing division when it reported third quarter numbers last November.
Wall Street will be watching for signs that the supply chain problems have begun to ease. Specifically, analysts will be watching to see if Roku’s hardware business returned to gross profitability in the fourth quarter, as well as a continued increase in active accounts and hours streamed.
On the plus side, management has tempered expectations for its Feb. 17 earnings release by providing guidance that it expects to report Q4 revenue of between $885 million and $900 million, which would be a 37.3% year-over-year increase.
While positive, that revenue growth would amount to the slowest quarterly sales growth since 2018. Roku has also guided for gross profit of $385 million, making the margin 43.1%.
This would be the lowest profit margin the company has registered since 2020. Any beat on these modest expectations will be seen positively by Wall Street and could help to move ROKU stock higher.
The median price target on ROKU stock among 26 professional analysts who cover the company is $346.00 a share, which implies 118% upside.
Be Cautious With ROKU
Roku has a lot to prove with its upcoming fourth quarter earnings. Any beat to the upside, and the company’s share price could soar.
Any further disappointment, though, and the stock is likely to be punished by investors who have shown already that they are in an unforgiving mood.
Given the high stakes involved, investors would be best advised to be cautious and take a wait-and-see approach with Roku. See how the stock performs coming out of earnings before deciding whether or not to take a position.
If the shares rise, jump in. But if they fall further, stay on the sidelines. Right now, ROKU stock is not a buy.
Disclosure: On the date of publication, Joel Baglole held a long position in C. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
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