Down 80% in This Bear Market, Can Roku Recover in 2023?

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Down 80% in This Bear Market, Can Roku Recover in 2023?


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Down 80% in This Bear Market, Can Roku Recover in 2023?

What happened

Shares of Roku (NASDAQ: ROKU) are down 79.8% since the S&P 500 index peaked on Jan. 3, 2022, according to data from S&P Global Market Intelligence. The media-streaming technology expert saw share prices fall in every month except November, which broke the downtrend with a modest 6.9% uptick. Otherwise, I’m looking at double-digit percentages in eight different months, led by particularly sharp drops in January and December.

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So what

Let’s start from the top. Roku’s price drop actually started way back in July 2021, as growth investing phenom Cathie Wood disclosed that her ARK Innovation fund had sold roughly 500,000 Roku shares. It’s all downhill after that, because many Roku investors seem to have lost conviction in this investment then and there.

More specifically, January’s 28.1% price cut started with macroeconomic concerns and accelerated when analysts poured fuel on the bearish fires. The stock was trading at a double-digit price-to-sales ratio and triple-digit price-to-earnings ratio at the time. It made some sense to call Roku shares overvalued under those circumstances. By the end of the month, the P/S ratio had dropped to 8.4, and shares were changing hands at 96 times adjusted earnings.

But the price drops didn’t stop there. Despite a steady stream of positive earnings surprises and robust revenue growth, Roku’s stock fell 14.9% in February, 10.2% in March, and continued down that trend line for most of the year.

On top of the broader market’s concerns about inflation and rising interest rates, Roku also battled a slowdown in digital advertising spending. Of course, this issue resulted from the wider macroeconomic problems inspiring ad buyers to tamp down their marketing budgets, accelerating an already sharp economic downturn in Roku’s specific corner of Wall Street.

Roku’s market struggles started to look silly by the end of 2022. The highest single-day jump all year was a 15.4% leap on Nov. 10, based on a slightly better inflation report than expected. The next day, an analyst issued a pretty bearish Roku report with a “hold” rating and a price target 20% below Roku’s then-current pricing. Still, the note also suggested that there wasn’t much more downside left in Roku’s exhausted stock after that. The result? A 10.4% stock price jump, of course.

And December was not very different. Roku’s stock kept falling a few percent most days, reporting 15 trading days in the red and only six in the black. No double-digit leaps in either direction, and all of it was powered by the economy at large. But it added up to the most painful month of 2022 with a total price drop of 31.7%.

Now what

You may have seen me pounding the table about Roku as a fantastic buy at dramatically discounted prices. In fact, this is my best stock idea right now, bar none. When I have spare cash to invest and the Fool’s ironclad disclosure policy lets me touch the stock again, Roku is currently first on my list of potential buys. Nothing else comes close.

That’s how I saw Roku in August, five months and 38% ago. The company hasn’t done anything to undermine my bullish conclusion, and the long-term business opportunity is still enormous. Streaming media is the name of the entertainment game now, and Roku is the service-agnostic platform provider that drives that train forward. Traditional cable and broadcast TV continue to dominate the time American consumers spend with video content, and the streamers are even further behind in the global picture.

Oh, and Roku’s stock is starting to look cheap in terms of fundamental value analysis, too. Today, you can pick up Roku shares at the perfectly ordinary price of 2 times trailing sales. The stock is spring-loaded for a spectacular recovery — maybe not soon but almost certainly over the next year or two — and I highly recommend buying Roku shares hand over fist.

You don’t want to be left behind when the Roku train takes off again.

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Anders Bylund has positions in Roku. The Motley Fool has positions in and recommends Roku. The Motley Fool has a disclosure policy.

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