Roku (NASDAQ: ROKU) is set to announce its earnings this Thursday. One outcome for the company is that it may surprise investors with a better-than-expected performance for its reporting quarter. This would not be unusual, as the company's chief rival Netflix (NASDAQ: NFLX) also beat expectations. Netflix reported that it lost 1 million subscribers in Q2'22, but this was far less than its anticipated forecasted loss of 2 million subscribers. Upon posting its earnings card, shares of Netflix surged 7%. The company's shares are currently up 21.98% for the month. A similar situation may hold true for Roku with analysts underestimating the company's performance, possibly leading to a rally for the stock. Let's investigate why that could happen, and some reasons for it not.
Analysts Expectations for Roku
A good place to start for Roku is with analysts' opinions regarding this stock. The company currently has a consensus rating of buy. Over the last 90 days 28 analysts have rated the stock, giving it 15 strong buy ratings, 2 buy ratings, 7 hold ratings, 1 sell rating, and 3 strong sell ratings. Shares of Roku currently have a 58.53% upside to the MarketBeat consensus price target. Analysts have generally been more optimistic than required over the short term when it comes to estimating its consensus price target with the stock severely underperforming the consensus from 2021 onwards. By the end of this year, analysts expect an EPS contraction of -3.25 and revenues of 3.12B for YoY growth of 12.82%.
Despite the company losing -66.82% YTD and severely underperforming the broader market (the S&P 500), which contracted by -14.16%, a cursory glance at the company's valuation ratios could give the impression that it is in fact still overvalued at its present levels on a relative basis. Part of the reason for this is that the company's EPS is negative at -0.82. This was due to a sharp sell-off in its net income and net profit margin, which contracted -252.89% and -228.97% respectively.
Comparing Roku's other valuation ratios such as Price / Sales, Price / Book, and Price Cashflow with the sector median returns an overvalued valuation by a wide margin. On an FWD Price / Sales basis, it's 146.51% more expensive than the median with 3.35 compared to 1.36. One of its most unfavorable valuation ratios is Price / Cash flow (TTM), with the company scoring 142.32 compared to the median of just 8.19, or a 1,637.51% difference. One interpretation of the company's sell-off is that it's reverting back to its intrinsic value due to reporting negative earnings, catalyzed by a sector rotation out of tech and discretionary stocks as investors' risk appetites change.
An Oversold Bounce is Possible
One theory of what may happen if Roku submits a bearish earnings card is that the stock will become oversold on the weekly charts and then bounce briefly higher. The company's stock price currently has steep downside momentum that started in September last year. The company has found support around the $80 levels for the majority of this year and it is barely holding above oversold levels at present. When the stock did dip into oversold territory bulls pushed it back towards its near-term support of the $80 psychological level, so another oversold bounce is more likely than not if a sell-off eventuates.