What’s interesting about Roku, to my mind, is that the stock is a key holding for fund manager Cathie Wood, who is seen as one of the world’s top growth/innovation investors. Currently, it’s one of the largest positions in her ARK Innovation ETF.

Should I add this Cathie Wood stock to my portfolio after the recent share price fall? Let’s take a look.

Why Roku’s share price tanked

Looking at Roku’s Q4 results, it’s easy to see why the share price fell.

For starters, Q4 revenue came in at $865.3m (up 33% year on year), well below the consensus forecast of $894m, and also below management’s guidance of $885m to $900m.

Secondly, income from operations for the period was down 67% year on year. Income was impacted significantly by sales and marketing expenses, which jumped 70% year on year.

Third, guidance for Q1 2022 was quite disappointing. This quarter, Roku expects revenue growth of 25% – below the consensus forecast of 30%. The group blamed supply chain disruptions and lower advertising budgets of some negatively affected companies for the deceleration in top-line growth.

2021 highlights

There were plenty of positives in the results, however.

One was that the group added 8.9m active accounts in 2021, and ended the year with over 60m active accounts. And average revenue per user (ARPU) grew to $41.03, up 43% year on year.

Another was that the company was the number one streaming platform in the US, Canada, and Mexico by hours streamed for the year. It’s worth pointing out that the Roku OS also remained the top selling smart TV OS in the US, representing more than one in three smart TVs sold.

Meanwhile, the group had success with its Roku Channel in 2021. Here, streaming hours more than doubled year on year for the full year.

This all suggests that the company is still a major player in the streaming space, and enjoying plenty of success right now.

Can Roku keep growing?

My main concern here though is in relation to the sustainability of the company’s growth levels.

While Roku’s streaming devices added a lot of value for consumers in the past, they could be less relevant in the future. That’s because today, most TVs come equipped with smart functionality. As people continue to upgrade their TV sets to new smart TVs, and buy products from the likes of Samsung, LG, and Sony, Roku’s growth could slow. Roku is addressing this issue by exploring the idea of manufacturing its own TVs. I still see a lot of uncertainty, however, as I don’t see a genuine competitive advantage here.

Another concern for me is the valuation. For 2022, analysts expect Roku to generate earnings per share of $1.63. At the current share price, that puts the stock on a forward-looking price-to-earnings ratio of about 65. That’s quite high. If future growth is disappointing, the stock could continue to underperform.

Roku stock: my move now

Given the risks surrounding the valuation and future growth levels, I’m going to leave this Cathie Wood stock alone for now. To my mind, the risk/reward skew doesn’t look so attractive.

All things considered, I think there are better growth stocks for me to buy today.

The post Cathie Wood stock Roku just crashed. Is it time to buy? appeared first on The Motley Fool UK.

So, what happened? And is this actually a buying opportunity for my portfolio?

A unique streaming platform

As a reminder, Roku is a streaming service similar to Netflix or Amazon Prime. But rather than primarily focusing on offering original content, the firm has ventured into the hardware space.

Using a Roku Player device, non-smart TV’s can gain access to almost all other streaming services through it. And the company even works directly with TV manufacturers to install the Roku platform as the operating system on these devices.

This strategy has enabled the group to remain competitive in an area where new streaming services are constantly popping up. And it’s resulted in revenues growing from $399m in 2016 to $1.78bn in 2020. That’s an average annualised growth rate of 45%!

Needless to say, that’s quite impressive. So seeing Roku’s stock have a stellar run over the years is hardly surprising. But if the company is thriving, why is the share price now on a downward trajectory?

Roku’s stock falls on fears of a slowdown

Like any high-growth stock, Roku’s valuation is pretty lofty. Even after the recent tumble, its price-to-earnings ratio sits around 80. In my experience, with such a high price tag, the level of volatility also tends to be elevated, especially when fears of a growth slowdown is on the rise.

In its latest earnings report, guidance for its final 2021 quarter fell below expectations. Management set its net revenue outlook at $893m, versus analyst forecasts of $944m. But even beyond missed targets, there could be looming issues in its international expansion.

To date, most of Roku’s success has originated from within the US. But with the market now close to saturation, management is having to look elsewhere to find new growth opportunities. And a recent report by Atlantic Equities suggests the group could struggle against rising competition from the likes of Samsung and LG Electronics.

With that in mind, I’m not surprised to see Roku’s stock take a hit.

Is this actually a buying opportunity?

Facing new challenges abroad is hardly unexpected, in my opinion. But even with this increasingly competitive environment, I believe Roku is in a strong position. Alphabet (Google) recently signed a new deal with the company to keep YouTube and YouTube TV on Roku’s platform.

Meanwhile, despite having its own streaming device business, Apple has also signed a partnership with the firm to add Apple TV to Roku’s technology.

To me, this looks like the work of a wide economic moat. As such, I think the falling Roku stock price is actually a buying opportunity for my portfolio.

The post What’s going on with the Roku stock price? appeared first on The Motley Fool UK.

The Covid-19 pandemic created an ideal environment for many ARK companies including video meeting firm Zoom Video Communications (NASDAQ:ZM) and Roku (NASDAQ:ROKU), the digital media player specialist. These are two companies in ARK’s top six holdings that I believe encapsulate the ETF’s struggles this year. Up over 400% and 140% respectively in 2020, this year has seen both share prices come back down to earth. Cathie Wood remains optimistic though, buying the dips of both ‘stay-at-home’ stocks.

Zoom

Lockdowns gave Zoom the opportunity to accelerate growth beyond its wildest expectations. Last year, Zoom became a household name and even a verb cementing the company as a communications leader. These 2020 catalysts are waning, but Cathie Wood has continued to load up on the stock.

Last week, the company beat expectations on earnings and guidance. Yet following the update, the share price tumbled 15%. Why? Slowing growth in the number of its larger clients (those with more than 10 employees).

This metric grew at a disappointing 18% and suggests slowing growth among its most lucrative customers. This indicator is particularly important when I consider Zoom’s competition. Google and Microsoft have the pricing power to undercut competition such as Zoom. Their videoconferencing products also boast a more versatile and unified offering, attractive to large enterprises.

Zoom is building its own cloud contact centre service following the collapse of its proposed acquisition of Five9. New services like this will determine Zoom’s future growth but it would have benefited from absorbing Five9’s customer base. The acquisition and retention of customers could prove to be costly in the absence of lockdowns and the Five9 deal.

Roku

Like Zoom, the Roku share price took a dive following an earnings report in November. Despite beating on earnings estimates, it missed on revenue expectations. Deceleration in growth was partly blamed on supply chain issues. This impacted TV sales for the quarter, which dipped below pre-pandemic levels. Additionally, YouTube is pulling its apps from Roku. It remains to be seen whether that will dissuade potential customers from buying a Roku.

There are reasons for optimism, however. First Roku have entered the Latin American market. This is a huge opportunity as Brazil and Mexico are seeing huge growth in smart TV penetration. Roku can lean on its experience in the US to drive growth internationally.

Second, connected TV programmatic advertising could revolutionise digital media. Roku can capitalise on this potential boom. I’m particularly interested in its deal with Shopify, providing a lower barrier to entry for streaming TV ads as well as securing more small and medium ad dollars for Roku.

Cathie Wood is buying the dips. Should I?

I certainly see why Cathie Wood remains bullish on both Zoom and Roku, but see too much risk moving forward. It’s hard to argue that either company boasts an economic moat. Zoom is competing against tech behemoths Google, Microsoft and others. Roku is up against streaming, advertising and hardware titans including Amazon, Disney and Netflix. Their lofty valuations also deter me. Zoom’s P/E ratio is over 58 while Roku’s looks is an even bigger 113+. For these reasons, I won’t add shares of either company to my portfolio today.

The post 2 tumbling Cathie Wood stocks: will they bounce back in 2022? appeared first on The Motley Fool UK.

The backstory on Roku

The company I’m looking at is Roku (NASDAQ:ROKU). It’s a US-listed tech stock, but I can still buy it as a UK-based investor. Roku went public in 2017, and began life back in 2002. It manufactures digital media players and TVs on which to access streamed content. However, it has also branched into its own streaming channel. Recently, it bought the rights of streaming services from Quibi, another streaming platform, to add to its overall proposition.

It’s clearly a tech stock that’s appealing to customers. Although it might not seem a unique idea to us now, the ability to stream programmes to our TV is something that Roku brought to the mainstream. It benefits from gaining subscribers, selling advertising slots and licensing agreements with vendors.

The tech stock is also bringing people together in a profitable way. Subscribers had 18.3bn streaming hours during Q1, up 49% year-on-year. This growth was boosted as the number of active accounts continued to move higher. As of Q1, Roku had 53.6m active accounts that were streaming.

Reasons to consider buying

Usually, it’s the first mover in a particular industry that gains the competitive advantage in years to come. Roku is the first mover in the composite streaming space. Other platforms offer a streaming service, but few can bring together multiple content providers in one place quite like Roku. When you also add in the fact that the hardware being used is also from the firm, it has a powerful grip on the customer.

It actually reminds me of the situation Apple was in a few years ago when its Apple Watch came out. The fact that is could connect to your iPhone allowed Apple to grow its own ecosystem of products. The power of the connectedness of the brand made it logical for customers to stay with Apple. I see a similar strategy here. It paid off for Apple, so don’t see why it won’t for Roku.

In terms of it paying off, I like it as a tech stock as it isn’t burning through cash. Both platform and player revenue grew in double-digits in Q1 2021 when looking year-on-year. This allowed a gross profit for the quarter of $326.8m. 

Risks with the tech stock

I think the key risk with buying Roku as a tech stock is the negative impact as we come out of the pandemic. Will streaming hours decrease as people get back outside and back to normal life? I do see this as an issue. 

Another problem is the potential future pressure from a large tech brand that could eat into the market share of Roku. It has the first mover advantage, but market share could still be eaten away if another player enters the lucrative market.

Overall, I’m bullish on Roku and would look to invest.

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