A No-Lose Situation May Still Not Push Roku Stock Higher

This might be seen as the ultimate contrarian opinion, but I would be concerned about buying Roku (NASDAQ:ROKU) at its current price. There’s no question that Roku has been a winner during the pandemic. Still, I wonder if Roku investors are late to the party and rewarding the company for past performance?

The world was already changing their television viewing habits, and so the shelter-in-place initiatives were just more fuel to a growing fire. And by expressing caution, I’m not saying we’re going back in time. I’m simply looking at the math.

To make my case, let’s look at Roku’s quarterly revenue. In the three months ending June 30, the company took in $356.1 million. That was a 42% year-over-year increase and an 11% increase from the prior quarter.

That’s great news. However, it was a 14% decline from the fourth quarter of 2019. Now, Roku doesn’t have a long history as a publicly traded company. And in the two years ROKU stock has publicly traded, the fourth quarter has been its strongest quarter in terms of revenue. So the comparison may not be fair.

Or is it?

What happens if things stay the same or get better?

To understate the situation, Roku was fishing in a barrel during the pandemic. This wasn’t just about individuals staying home as much as possible. But for much of the country, the weather was lousy. So even if individuals wanted to, they weren’t going to work in the yard or take a walk or do anything outside to make the best of the situation.

Bullish analysts would say well revenue would have been higher IF (caps intended) advertising revenue was higher. To which I will contend IF advertising revenue was higher, we wouldn’t have been taking the strict mitigation efforts we were taking.

And if we weren’t staying at home, we wouldn’t have been viewing as much television. I think you see where this is going. If things continue to get better, with or without a vaccine, I see a gradual decline in viewership, but perhaps a slight increase in ad revenue. Although by Roku’s own estimation, ad spending is not expected to be anywhere close to normal until the second half of 2021.

What happens if things get worse?

Sadly, we know the answer to that. It’s back in the penalty box we go. That would likely be good news for Roku in terms of viewers. But it would likely have an adverse effect on ad revenue. This is what I mean when I say Roku can be in a no-lose situation and still see its stock go lower.

And this is where it’s important to mention a couple of things that would be different this time around. First, HBO Max and NBC Peacock were not launched in the first part of the year. As of this writing, Roku does not have agreements with either provider. Although this is expected due in part to consumer demand for it, it hasn’t happened yet.

Second, there were no live sports the first time around. Now, I’m sure if there was fear of a wide-scale outbreak, live sports may bet shuttered again. But I don’t think it would be as long-lasting. Professional sports found a way. That statement can make you cynical or hopeful, but they found a way.

And the National Football League that starts in about a week is a huge ratings booster. And for many football fans, it will be hard to watch their favorite out-of-market teams without the NFL Sunday Ticket. And with many bars and restaurants still unable to accommodate throngs of fans, that means fans might be stitching back together the cord they cut.

ROKU will be a great buy-on-the-dip opportunity

Investors have a herd mentality. That’s the only thing that explains why Roku stock fell as far as did in March. Anybody with a whit of common sense would have predicted that Roku would be a big winner. And now it seems the herd has overcorrected and pushed the stock up to its all-time high.

It’s not to say it shouldn’t have gone there, it just seems like it went down too far too fast and now it’s gone up too far too late.

Simply put, you can be of the opinion that Roku represents the future of television and still believe that the stock is overvalued at its present level. Analysts seem to agree. The consensus price target shows the stock dipping about 12% from current levels.

And when it does, you can buy the stock and catch the next wave up. But right now, even though Roku really can’t lose no matter how the economy goes, I think the risk outweighs the reward.