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Roku May Have a Little Further to Fall, But It’s Still a Growth Stock

InvestorPlace - Stock Market News, Stock Advice & Trading Tips Roku may have a little further to fall. But ROKU stock could turn around if growth...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

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Roku (NASDAQ:ROKU) is still a growth stock, despite the fact that it’s been falling lately. In fact, in my last article on ROKU stock, I wrote that it could end up falling some 20% to 30% from Aug. 11. That was when it was at $369.21. Since then, it has fallen 9%.

ROKU Stock Will Continue Benefitting From the TCL Partnership
Source: Michael Vi / Shutterstock.com

Now, given that there are a number of factors that could lead us to believe ROKU could still drop, investors might be willing to wait for a further decline. But the most recent trough that the company had was at $336.67 on Jun. 16. So, the recent Sept. 9 close price of $338.46 per share came in just above that.

As such, I took another look at the Roku’s second-quarter shareholder letter from Aug. 4. Now I believe that the company’s growth is still intact. It might be possible that ROKU stock is nearing a near-term trough, especially if Q3 results are not as bad as expected.

Analyzing Roku’s Growth

One of the great things about Roku’s earnings presentations is that they show all the past five quarters of revenue, earnings and other metrics. This includes things like active accounts, streaming hours, ARPU (average revenue per user) and EBITDA (earnings before interest, taxes, depreciation, and amortization). Essentially, this allows us to analyze its trends more carefully.

For example, even though streaming hours fell from 18.3 billion hours during Q1 to 17.4 billion hours in Q2, this was still higher than the 17 billion hours seen in Q4 2020. That was when Covid-19 was getting started and it peaked during Q1. One might easily expect this to occur. And, the silver lining is that the streaming hours in Q4 were also still higher than those in Q3 and Q2 last year.

Moreover, this did not affect the growth in Roku’s ARPU rate. In fact, ARPU actually grew 13.4% in Q2 over Q1. This implies a compound annual growth rate (CAGR) of 65.6%. That is even higher than the year-over-year (YOY) rate of 46% for Q2. In other words, ARPU may be accelerating. And, if streaming hours do not fall that much during Q3, or even stabilize, then Roku’s revenue growth rate could begin accelerating again.

For example, the company’s platform revenue — its largest segment — grew by 117% YOY, but its quarterly growth rate over Q1 was just 14.1%. So, the Q2 rate (if it stays at 14.1% over the next year) will result in a CAGR growth rate of 69.5%.

Let’s think about that. This is still a very high rate of growth for the company’s revenue. And if ARPU keeps rising with steady streaming hours, it could begin accelerating again. That is the formula for ROKU stock to climb once more.

Where This Leaves ROKU Stock

What I am saying here is that, although ROKU stock may continue to drop a bit, it may actually be nearing a trough. The stock might actually move higher in anticipation that Q3’s growth will come in better than expected.

Most analysts now think that ROKU is worth considerably more than its present price. For example, Seeking Alpha’s survey of 24 analysts indicates an average price target of $468 per share, or 38.3% over the Sept. 9 price. Additionally, Yahoo! Finance shows 24 analysts give the stock an average price target of $470.67, or 39% higher.

Given that these analysts still feel strongly about the stock — and that there seems to be room for it to turn around — investors might consider a toehold stake in this name. That means not putting your whole intended position in at one price. It is possible you will have to average down to get a full position.

On the date of publication, Mark R. Hake did not hold any positions (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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