Shares in streaming device company Roku (NASDAQ: ROKU) are having a tough time in 2022. Today, the stock has crashed more than 25% on the back of the company’s Q4 2021 results.
What’s interesting about Roku, to my mind, is that the stock is a key holding for fund manager Cathie Wood, who is seen as one of the world’s top growth/innovation investors. Currently, it’s one of the largest positions in her ARK Innovation ETF.
Should I add this Cathie Wood stock to my portfolio after the recent share price fall? Let’s take a look.
Why Roku’s share price tanked
Looking at Roku’s Q4 results, it’s easy to see why the share price fell.
For starters, Q4 revenue came in at $865.3m (up 33% year on year), well below the consensus forecast of $894m, and also below management’s guidance of $885m to $900m.
Secondly, income from operations for the period was down 67% year on year. Income was impacted significantly by sales and marketing expenses, which jumped 70% year on year.
Third, guidance for Q1 2022 was quite disappointing. This quarter, Roku expects revenue growth of 25% – below the consensus forecast of 30%. The group blamed supply chain disruptions and lower advertising budgets of some negatively affected companies for the deceleration in top-line growth.
2021 highlights
There were plenty of positives in the results, however.
One was that the group added 8.9m active accounts in 2021, and ended the year with over 60m active accounts. And average revenue per user (ARPU) grew to $41.03, up 43% year on year.
Another was that the company was the number one streaming platform in the US, Canada, and Mexico by hours streamed for the year. It’s worth pointing out that the Roku OS also remained the top selling smart TV OS in the US, representing more than one in three smart TVs sold.
Meanwhile, the group had success with its Roku Channel in 2021. Here, streaming hours more than doubled year on year for the full year.
This all suggests that the company is still a major player in the streaming space, and enjoying plenty of success right now.
Can Roku keep growing?
My main concern here though is in relation to the sustainability of the company’s growth levels.
While Roku’s streaming devices added a lot of value for consumers in the past, they could be less relevant in the future. That’s because today, most TVs come equipped with smart functionality. As people continue to upgrade their TV sets to new smart TVs, and buy products from the likes of Samsung, LG, and Sony, Roku’s growth could slow. Roku is addressing this issue by exploring the idea of manufacturing its own TVs. I still see a lot of uncertainty, however, as I don’t see a genuine competitive advantage here.
Another concern for me is the valuation. For 2022, analysts expect Roku to generate earnings per share of $1.63. At the current share price, that puts the stock on a forward-looking price-to-earnings ratio of about 65. That’s quite high. If future growth is disappointing, the stock could continue to underperform.
Roku stock: my move now
Given the risks surrounding the valuation and future growth levels, I’m going to leave this Cathie Wood stock alone for now. To my mind, the risk/reward skew doesn’t look so attractive.
All things considered, I think there are better growth stocks for me to buy today.