Roku (ROKU) Stock Trades Up, Here Is Why

Petr Huřťák /
2024/04/23 2:48 pm EDT

What Happened:

Shares of streaming TV platform Roku (NASDAQ: ROKU) jumped 6.3% in the morning session after equities (Dow +0.8%, S&P 500 +1.2%, Nasdaq +1.6%) surged for the second straight day with the start of earnings season showing that the health of companies that reported Q1 earnings was solid and that the economy seems to be holding up. Only about a fifth of S&P 500 companies have reported, but roughly three-quarters of them have beat expectations. This may be spurring dip buying following elevated volatility in the previous two weeks of trading. 

Treasury yields pulled back suggesting markets are tempering the growing concerns about the possibility of higher for longer interest rates following recent economic data highlighting sticky inflation, ahead of the Fed's expectations. 

While earnings thus far have been encouraging, most companies have yet to report. Microsoft, Alphabet and Meta will report this week, and many other bellwethers will announce their results in the coming weeks. 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market. After the initial pop the shares cooled down to $61.23, up 4.5% from previous close.

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What is the market telling us:

Roku's shares are very volatile and over the last year have had 26 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was 2 months ago, when the stock dropped 22.3% on the news that the company reported fourth-quarter results and provided slightly underwhelming outlook for the coming quarters. The company lacked specificity that the market craves when discussing its full-year 2024 EBITDA forecast (it stated that EBITDA would be "positive" rather than sharing a number - Wall Street was expecting $100 million of EBITDA for 2024). Management cited challenging macroeconomic conditions and an uneven ad market recovery, and they anticipate seasonal revenue declines in line with Q1 2023, alongside tough year-over-year growth rate comparisons in streaming services distribution and a challenging media and entertainment landscape. 

Additionally, the company has averaged 8% upside to Wall Street's revenue estimates since Q3 2022, so Roku's more modest beat this quarter may be causing investors to level set with regards to expectations. On a more positive note, Roku beat analysts' revenue expectations as it grew its user base and outperformed in its Platform and Devices segments. Its revenue guidance for next quarter also topped analysts' expectations. Overall, this quarter's results seemed mixed, but the market was likely expecting more.

Roku is down 31.2% since the beginning of the year, and at $61.23 per share it is trading 42.7% below its 52-week high of $106.87 from November 2023. Investors who bought $1,000 worth of Roku's shares 5 years ago would now be looking at an investment worth $994.96.

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