Is now a good time to buy Roku (ROKU) stock? This remains the key question investors are asking ahead of the company’s fourth quarter fiscal 2022 earnings results, which are due after the closing bell Wednesday.
Shares of the video streaming specialist have been clobbered over the past year as the company has struggled with decelerating revenue and falling profits. Aside from increased competition, revenue was hurt by weak advertising demand. Meanwhile, to combat the competition, the company’s costs have risen, creating a double-edge sword that impacted profits. But after absorbing all of this punishment, now could be a good time to bet on a recovery.
Jason Helfstein, analyst at Oppenheimer, who has an Outperform rating on the stock, last week raised his price target on ROKU from $70 to $75. With the stock trading at around $54, that price target assumes potential premiums of close to 40%. Helfstein’s growth forecast is encouraging, particularly as the company recently announced that it has surpassed 70 million global active accounts, marking growth of 16.5% year over year.
The company also announced plans to develop its own “first-ever Roku-made” and “Roku-branded” TVs which is expected to hit the market at some point this year. “These Roku-branded TVs will not only complement the current lineup of partner-branded Roku TV models, but also allow us to enable future smart TV innovations. The streaming revolution has only just begun,” the company said.
The company aims to be more integrated into the home, thereby making its product much tougher to separate from. With the shares down nearly 70% from their 52-week high of $171, the stock is now priced at an attractive valuation, given that the most bullish Wall Street target has the stock reaching $90, suggesting potential returns of 66%. On Wednesday the company must nonetheless deliver a top- and bottom line beat, along with confident guidance to demonstrate its value.
In the three months that ended December, the Los Gatos, Calif.-based company is expected to lose $1.73 per share on revenue of $804.19 million. This compares to the year-ago quarter when earnings came to 17 cents per share on revenue of $865.33 million. For the full year, the loss is expected to be $3.61 per share, reversing a per-share profit of $1.71 a year ago, while full-year revenue of $3.05 billion would rise 10.4% year over year.
The company has enjoyed both rapid revenue and account growth, thanks to the continued shift away from traditional media. The streaming industry has spawned record number of new user sign-ups. However, the market has begun to question whether the company can maintain its historical growth rate. Helfstein believes there will be an “inflection” coming for Roku in the first half of the year. “We are forecasting global [connected TV] will reach 42% of TV spend or 9.7% of digital media,” Helfstein wrote in a note to clients.
But the company’s recent quarterly results haven’t been enough to impress investors. In the third quarter, the stock dropped even though the company beat on both the top and bottom lines. Revenue rose 12% to $761.37 million, compared to prior growth of more than 70%. Q3 gross profit fell 2%, while platform grosses fell 1% to $374.2 million. Gross margin fell by 6.7 percentage points, down 9.2 points on Platform and down 4.2 points in Players.
The margin impacts led to player gross losses widening to $17.5 million. However, for the stock to rebound, and reach the bullish targets, the company on Wednesday must improve its profitability metrics metrics and show that its new revenue growth initiatives are bearing fruit.
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