On Friday Roku Inc. (NASDAQ: ROKU) stock tanked and at the close of trading, it was 19% down. The drop comes after Jeffrey Wlodarzak of Pivotal Research started coverage on Roku with a price target of $60.
Roku is up 250% since the beginning of the year. One may begin to wonder whether the stock has risen too fast and too high. Here is what you should know regarding the valuation of the stock.
ROKU Stock Price Catalyst? Strong Revenue Growth
The rate of revenue growth has increased and in the past three quarters, the YoY rate of revenue growth has increased. This culminated to the growth of 59% that the company posted in the quarter.
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As a result of the strong growth posted the company reviewed its full-year outlook. In Q2 management indicated that they expect revenue of between around $1.08and $1.1 billion from a prior estimate of between $1.03 and $1.05 billion.
This also changed the dimension of the margins and the company now expects the net loss to range from $61 million to $71 for the year.
Is Roku worth the $12.6 billion market cap?
Based on its growth, Roku stock price is growing just the way it is valued. However, the underlying question is whether the company’s operations can rationalize its market capitalization of almost $13 billion. It’s rather tricky to justify this valuation built on the company’s net loss estimated to be $22 million in the last 12 months.
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However one metric makes sense and that is the gross profit which has skyrocketed. In the year ended June 30, the company reported a gross profit of $406 million increase from the $200 million reported in 2017. If the company can manage to moderate expenses then it can continue increasing its gross profits.
While Roku stock has potential its current valuation is highly speculative. For Roku to live to its valuation it has to continuously grow its gross profit as well as cut on operating expenses. The stock could eventually live to expectations of investors but for now, buying the stock will need a lot of faith.
