Roku, Inc. (ROKU) runs a television streaming platform. The business is divided into two operational segments: Platform and Player. The stock has dropped 68% year-to-date and 11.4% over the past three months to close its last trading session at $73.02.

ROKU has been impacted by growing worries about dwindling consumer discretionary spending, multi-decade high inflation, and increasing competition. This year, lower consumer and advertiser demand significantly impacted the company's financial performance.

The company claimed that the second quarter's macroeconomic uncertainties caused a significant slowdown in TV advertising spending, which hampered platform revenue growth. Both consumers and advertisers significantly reduced their ad scatter market spending owing to consumers' tightening of discretionary spending.

Here's what could shape ROKU's performance in the near term:

Disappointing Financials

ROKU's total revenue increased 18.5% year-over-year to $764.41 million for the second quarter ended June 30, 2022. However, its operating loss came in at $110.51 million, compared to an operating income of $69.08 million a year ago.

The company reported a net loss of $112.32 million, compared to a net income of $73.47 million in the prior-year quarter. Its loss per share amounted to $0.82. In addition, its cash and cash equivalents came in at $2.05 billion, representing a decrease of 4.5% for the six months ended June 30.

Negative Profit Margins

ROKU's trailing-12-month CAPEX/Sales of 2.6% is 39.7% lower than the industry average of 4.3%. Also, its trailing-12-month ROA, net income margin and ROE are negative 1.07%, 1.51%, and 1.72%, respectively. Moreover, its trailing-12-month EBITDA margin of 5.74% is 70.7% lower than its industry average of 19.6%.

Premium Valuation

In terms of trailing-12-month Price/Cash Flow, the stock is currently trading at 137.26x, 1613.6% higher than the industry average of 8.01x. Also, its forward Price/Book of 3.87x is 106% higher than the industry average of 1.88x. Moreover, ROKU's forward Price/Sales of 3.23x is 158.5% higher than the industry average of 1.25x.

Poor Earnings Estimates

Street expects the company’s EPS to decline 364.6% in the current quarter ending September 2022 and 717.6% in the next quarter ending December 2022. Also, its EPS is expected to remain negative in the current and next years. In addition, ROKU failed to surpass the consensus EPS estimates in two of the trailing four quarters.

POWR Ratings Reflect Bleak Outlook

ROKU has an overall F rating, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. ROKU has an F grade for Growth and Sentiment and a D for Stability. Analysts’ poor earnings projections are in sync with the Sentiment and Growth grades. In addition, the stock beta of 1.68 justifies the Stability grade.

Of the 59 stocks in the C-rated Consumer Goods industry, ROKU is ranked #56.

Beyond what I've stated above, you can view ROKU ratings for Quality, Momentum, and Value here.

Bottom Line

ROKU's poor bottom-line performance owing to slowing consumer demand due to persistent inflationary pressures is concerning. Furthermore, rising competition may further limit the company's prospects.

Also, the stock is currently trading below its 50-day and 200-day moving averages of $77.43 and $120.8, respectively, indicating a bearish sentiment. Given its poor financials, weak earnings projections, and lower-than-industry profit margins, we think it may be prudent to avoid the stock now.

How Does Roku Inc. (ROKU) Stack Up Against its Peers?

While ROKU has an overall F rating, one might want to consider its industry peers, Mannatech Incorporated (MTEX) and Ennis Inc. (EBF), which have an overall A (Strong Buy) rating.

ROKU shares fell $0.72 (-0.99%) in premarket trading Tuesday. Year-to-date, ROKU has declined -68.44%, versus a -18.19% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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