Roku's (NASDAQ:ROKU) Strong Growth may be Volatile For the Stock in the Short Term

Roku, Inc. (NASDAQ:ROKU) is expected to post earnings results on 4th August, Wednesday after market close. The earnings are anticipated to be meaningful because this period marks an opportunity for the company to promote itself to the large number of users whose lifestyle continues to be changed because of the pandemic.

For this earnings call, Roku is expected to post profitable earnings of US$0.12 dollars per share. The company is on track to outperform both the industry and market with its forecasted 52.5% annual earnings growth.

Roku had a total of 53.6 million active accounts at the end of Q1 2021, and is targeting double-digit growth with their operating system and hardware. Roku might benefit from the confusion of streaming platforms and the users that want to switch to an ad-based streaming model while the streaming wars stabilize and each platform develops content for a specific consumer.

Sentiment and Future Growth

Some investors are bearish however, with ARK investment selling US$269M worth of shares for Roku this July, indicating that high growth also means high volatility and that the stock has potentially peaked in the short term. 

Roku is a streaming provider and not a streaming platform, which is why some investors insist that the company is unaffected by the streaming wars.

However, this mentality might be biased, as companies who engage in intense competition are known to form their own sticky ecosystems and make it difficult for users to cross over to other competitors. This might lead to more exclusive only content from platforms and make it harder for Roku to find quality streaming content.

That being said, there will probably still be a lot of room for cooperation and providing specific streaming content to a targeted group of users. If positioned properly, Roku can use this to be the market leader for these specific users. Consumers can use the Roku platform for streaming premium content from: Discovery+, Disney+, HBO Max, Paramount+, Peacock, Amazon Prime Video, AppleTV+, Hulu, and Netflix.

On a more general note, Roku share price is up a whopping 822% in the last three years, a handsome return for long term holders. Also pleasing for shareholders was the 28% gain in the last three months.

Check out our latest analysis for Roku

While Roku made a small profit, in the last year, we think that the market is probably more focussed on the top line growth at the moment. As a general rule, we think this kind of company is more comparable to loss-making stocks, since the actual profit is so low. It would be hard to believe in a more profitable future without growing revenues.

In the last 3 years Roku saw its revenue grow at 42% per year. In light of this attractive revenue growth, it seems somewhat appropriate that the share price has been rocketing, boasting a gain of 110% per year, over the same period.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

Roku is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. If you are thinking of buying or selling Roku stock, you should check out this free report showing analyst consensus estimates for future profits.

Key Takeaways

We're pleased to report that Roku rewarded shareholders with a total shareholder return of 177% over the last year. That gain actually surpasses the 110% it generated (per year) over three years. The improving returns to shareholders suggests the stock is becoming more popular with time.

The company is currently in high-growth and may stay there for quite a while as it benefits from changing user preferences boosted by the pandemic lifestyle and the confusion of the streaming wars. Their growth is also influenced by previous adoption as economies of scale pick-up and the platform will find it easier to expand even further.

On the cautionary side, it seems that Roku is already trading at an expensive price, and the road ahead might be volatile for short to medium term investors.

It is very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Case in point: We've spotted 3 warning signs for Roku you should be aware of.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.