Insights

Why Roku Stock Just Popped

What happened

Friday was a rough day for Roku (NASDAQ: ROKU) shareholders. The streaming TV device-maker suffered its worst-ever one-day stock price decline — 23% — after a miserable second-quarter report led multiple Wall Street analysts to cut their price targets on the stock and downgrade it. Monday’s story, however, is a bit different. Roku shares were up 9.5% as of  12:30 p.m. ET.

And Roku is rising despite analysts’ latest comments.

So what

In a delayed response to Roku’s report, on Monday morning, investment bank Morgan Stanley cut its price target on the stock by 31% to $55 and reiterated its underweight rating.

Despite growing revenues by 18% year over year in Q2, Roku reported last week that it swung from a profit in the year-ago period to a loss of $0.71 per share. Adding insult to income statement injury, Roku warned that its revenues would only grow by about 3% in the third quarter — and that it would lose money yet again.

Wall Street didn’t like that news very much. Investment banking company  Roth Capital and mega-bank Bank of America both went so far as to double downgrade the Roku stock all the way from buy to sell. Morgan Stanley wasn’t best pleased either, opining on Monday that it’s hard to even “call a valuation floor on the shares” given how rapidly Roku’s business growth is slowing, and how much its gross margins have eroded, reported TheFly.

Now what

Roku stock is now down 85% from the all-time high it hit just a little over a year ago.

Clearly, somebody used to think that Roku shares were worth a lot more than the $72 or so that they now cost. What we could be seeing Monday, therefore, is a mad scramble among investors to scoop up Roku shares on the cheap before it turns the corner and resumes growing rapidly. Either that, or we could be seeing traders who sold Roku short before earnings buying back shares to close out their short positions.

Monday’s price moves could even reflect both those phenomena!

As for me, I’m taking a wait-and-see position on the stock. On the one hand, I do still consider Roku the dominant business in streaming, particularly in the niche of streaming TV boxes. On the other hand, though, I still find it hard to get too excited about this valuation on a company that has lost money in four of the past five years, that analysts forecast won’t be profitable again before 2026 at the earliest, and that just turned free cash flow negative.  

I’m certainly not excited enough about Roku stock to want to pay 10% more for it than I could have paid on Friday.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.

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