Why Investors Shouldn't Be Surprised By Roku, Inc.'s (NASDAQ:ROKU) P/S

When close to half the companies in the Entertainment industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, you may consider Roku, Inc. (NASDAQ:ROKU) as a stock to avoid entirely with its 3.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Roku

What Does Roku's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Roku has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Roku.

Is There Enough Revenue Growth Forecasted For Roku?

In order to justify its P/S ratio, Roku would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.8% last year. The latest three year period has also seen an excellent 119% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader industry.

With this information, we can see why Roku is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look into Roku shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Roku that you need to be mindful of.

If you're unsure about the strength of Roku's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.