Since pulling back from all-time highs back in February, Roku (ROKU) stock hasn’t had much luck bouncing back. The streaming pioneer continues to charge ahead. Having gotten its start in the hardware end of the business, lately it’s been expanding its role in the content end as well.
In theory, this move should have investors excited. Yet, after already bidding up the stock at the end of 2020, much of what’s coming up has likely been factored into its share price. That’s clear from its current valuation. (See ROKU Stock Analysis on TipRanks)
Add in the fact that competition is heating up in the streaming arena, and it’s understandable why investors have taken such an “on the fence” view. For now, this mixed sentiment could continue.
The company may be making the right moves. Nevertheless, until investors start seeing tangible positive results from its further expansion, investors will remain hesitant to bid up shares much higher from today’s prices (around $347 per share).
ROKU Stock and Streaming Competition
Roku may have made a name for itself as a purveyor of streaming devices. On the other hand, in order to stay ahead of tech-based rivals like Amazon (AMZN), Apple (AAPL), and Google parent Alphabet (GOOGL), it knows it has to offer up more than just streaming devices, and an ad network for third-parties.
That’s why Roku has been making a big push into streaming content as of late. This includes its purchase of failed streaming app Quibi’s content library, as well as its deal to stream new releases from independent studio Saban Films.
At a time where Amazon is cutting big checks to secure content (its $9 billion deal to buy MGM), and content giants are planning to merge, like the pending WarnerMedia/Discovery (DISCA) deal, will Roku’s efforts be enough?
Only time will tell. As its valuation remains sky-high, and investors take a “wait and see” approach, it may be difficult for shares in the near-term to move much higher from today’s prices.
Valuation Could Hold, But There’s Little Room for Expansion
It’s still uncertain whether Roku’s push into content will pay off. Yet, that’s not to say analysts aren’t projecting high levels of growth in the coming year. Set to grow its revenues by 54.1% this year, estimates call for the top line to grow another 36.8% in 2022. Earnings are also set to explode over the next year. Estimated to earn 37 cents a share this year, its bottom line is expected to rise by 127.5% next year, to $1.02 per share.
This high level of growth is why the stock has managed to achieve and maintain such a high valuation. At today’s prices, the stock sells for 12.2x estimated 2022 sales, and a staggering 338.7x 2022 earnings.
Given that its projected growth remains high, and there’s a possibility its streaming expansion could result in better-than-expected results, ROKU stock may not be at risk of pulling back further on multiple contraction.
On the other hand, could it see multiple expansion in the near future? Probably not. Already selling at a premium to not just its more diversified tech and entertainment industry rivals, but streaming pure plays like Netflix (NFLX) as well, it’s questionable whether this is in the cards.
What Analysts are Saying About ROKU Stock
According to TipRanks, ROKU stock has a consensus rating of Strong Buy. Out of 18 analyst ratings, 15 rate it a Buy, 2 analysts rate it a Hold, and 1 analyst rates it a Sell.
As for price targets, the average analyst Roku price target today is $449.94 per share, implying around 29.7% in upside from today’s prices. Analyst price targets range from a low of $300 per share, to a high of $560 per share.
Bottom Line: Expect Investors to Continue Taking a ‘Wait and See’ Approach
Even after its nearly 30% pullback from its February highs, Roku’s future growth is still largely factored into its stock price. In order to wow investors once again and kick off a rebound back to prior highs, it needs to not only meet, but beat, expectations.
Better-than-expected results could be ahead if its recent aggressive push into content pays off. Until that happens, expect investors to continue taking a “wait and see” approach with ROKU stock.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.