Is Roku (NASDAQ: ROKU) Bottoming Out?

• Pivotal Research upgraded their rating on Roku, moving it to a Hold from a Sell
• Cathie Woods of Ark fame has been among their biggest supporters in recent weeks
• Fundamentally, there are reasons to like the stock as well

 
After falling as much as 85% since last summer, we might be finally starting to look at what will be called the bottom in Roku’s (NASDAQ: ROKU) sell-off. Shares dipped briefly below the $80 mark in the initial weeks of May, but since then have started to consolidate. This is typically the first step in any bottom and will surely come as a massive relief to Roku investors. They were the heroes for much of the COVID pandemic, as Roku shares rallied close to 700%, but for the past year they’ve been zeroes. Like many other darlings of the pandemic whose shares seemingly defied gravity for a few perfect months, Roku’s bubble has firmly burst and its back trading at pre-pandemic levels. 

But for those of us who avoided buying at or near the top, there are a few reasons to start thinking about a fresh long position. Let’s jump in and take a look at them. 

Fresh Upgrade

Late last week the team over at Pivotal Research upgraded their rating on Roku, moving it to a Hold from a Sell. While not quite the full double upgrade that most would have preferred, it was a welcome step in the right direction. Their thinking is that the 60% sell off in its shares this year so far has brought its valuation back to “reasonable” levels in light of the current environment. 

Analyst Jeff Wlodarczak kept his price target at $80, noting that even though the backdrop for the advertising market is tough, especially in light of Snap's (NYSE: SNAP) recent results, a slowing economy, the TikTok threat and impacts from Apple's (NASDAQ: AAPL) operating system changes, noting that "TV spend would seem to be relatively better insulated here against these trends." "In addition, a recession arguably could speed up the swap away from traditional PayTV to streaming," Wlodarczak added.

The move is made all the more interesting by the fact that Pivotal were among those who downgraded Roku to a Sell back in February. At the time, this was based on several data points, including "mixed" fourth-quarter subscriber results and guidance, a mature streaming market in the U.S., increased spending in 2022, as well as the potential for a recession and a cable company getting into streaming aggregation. Wlodarczak went out of his way last week to point out that while none of those concerns have been alleviated, the "material decline" in shares has made the company’s valuation a little easier to stomach. 

It’s worth noting that even with the multi-month decline that shares have seen, their price-to-earnings ratio is still close to 100. There could well be an argument that Roku is still frothy even at these levels, but from a technical perspective at least the momentum is starting to swing to the upside. This has not been missed on Wall Street either. Cathie Woods of Ark fame has been among their biggest supporters in recent weeks, and her flagship ARK Innovation ETF now counts Roku as its top holding. 

Decent Momentum

Fundamentally, there are reasons to like the stock as well, especially if you’re thinking about the long-term opportunity. Their most recent earnings report, released at the end of last month, showed revenue for Q1 was up 28% on the year and ahead of analyst expectations. Platform revenue specifically increased 39% year on year to $647 million, while gross profit jumped 12%. In addition, the average revenue per user grew 34%. These are growth numbers not to be sniffed at, particularly when the underlying stock has fallen as much as it has.

There’s no doubt that as a high-growth tech name Roku has suffered from the high inflation prints and tightening monetary cycle we now find ourselves in, but it might not be all that unreasonable to say their shares are even starting to look undervalued here. Investors thinking about getting involved have a recent low of $78 to work their entries and exits around, while to the upside we can easily see a relief rally taking them back towards $120. They’ve already jumped 30% off May’s low, it’s not hard to see them go another 30% in June.