Stock Market

Despite Still-Rich Valuation, Roku Stock May Be a Buy

It goes without saying that Roku (NASDAQ:ROKU) has been making headlines over the past month. Mainly, due to rumors that Neftlix (NASDAQ:NFLX) wants to buy it. Chatter about this gave ROKU stock a boost in early June, but market volatility has knocked it lower since then.

The question now is whether it is worthwhile to dive into the video streaming operator. On one hand, it may make sense. A buyout by Netflix is a possibility. Another strategic buyer could make an offer for it, as well. Even if it doesn’t get bought out, staying independent could also pay off for it via partnership deals.

On the other hand, it is not as if there isn’t downside risk. If neither a deal nor a partnership emerges, shares could sink further due to multiple compression. Still, this may be a situation where the positive outweighs the negative.

Ticker Company Price
ROKU Roku, Inc. $94.75

ROKU Stock and Takeover Talk

Excitement over a possible Netflix deal has calmed down since earlier this month. After popping on the Netflix rumors, Roku shares were knocked down to a new 52-week low during the Jun. 13 broad market selloff.

But since then, ROKU stock has moved back up. It could continue to gradually climb whether a takeover deal happens or not. Chief Executive Officer Anthony Wood has made no public comment on whether a deal with Netflix is in the works, yet that doesn’t rule out the chance of a tie-up between the two streaming firms eventually.

Not only that, but other potential acquirers may have an interest in taking over Roku. For instance, as InvestorPlace’s Luke Lango mentioned on Jun. 10 when going through the ins-and-outs of this company being a takeover target, companies like AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA) may also be interested in buying it.

Video streaming continues to supplant cable television. Communications giants may want to hedge their bets and integrate Roku’s technology and ad platform into their existing business. Again though, it’s not as if a potential takeover (at a hefty premium) is the only catalyst out there for shares. Potential partnerships could also move the needle.

Roku’s Other Catalyst

More recently, there has been more talk of Roku and Netflix forming an advertising partnership, as opposed to Netflix buying the company outright.

This could be a win-win for both parties. For Netflix, it would provide it a seamless way to begin offering a cheaper, ad-supported version of its service. It would also be able to promote its platform on Roku’s platform. This could help drum up new subscribers.

For Roku, it could allow it to further scale up ad revenue. This could enable it to go from reporting negative earnings to reporting earnings much higher than analyst forecasts. Even better, the company isn’t entirely dependent on Netflix for a game-changing deal.

In fact, it now has a separate partnership deal in the works with Walmart (NYSE:WMT). The platform will air shoppable ads for Walmart. While not as major of a game-changer as a potential Netflix partnership, the Walmart partnership could still help this company with its revenue growth efforts. Having noted all these positives, there is, however, one concern to look out for.

It’s a Buy, But Keep Risks in Mind

Although Roku shares have fallen more than 80% from their all-time highs, it is far from being a value play. At today’s prices, it trades for 89x trailing 12-month earnings. It is also expected to report negative earnings this year and in 2023.

Even while it has more than one path to upside, it is possible neither of its catalysts pan out. If it can’t find another pathway to consistent profitability, it may be difficult for the stock to maintain, much less grow, its current valuation.

How far could shares drop from here? A possible recession causes growth to slow down greater than currently anticipated. This could cause a further derating. A re-hitting of its recent low and a hitting of new lows may not be out of the question.

Still, there are two big game-changers possibly in motion. This may outweigh any valuation concerns, leading me to lean bullish on ROKU stock.

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

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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