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Why Roku Stock Is Tumbling Today
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Why Roku Stock Is Tumbling Today

Why did Roku’s stock crash despite strong earnings? The thin reasons behind the price drop could amount to a buying opportunity.

Media streaming technology expert shares Roku (ROKU -22.00%) took a swan dive on Thursday after the company reported third-quarter results late Wednesday. The stock was down 20.6% at 11:45 a.m. ET.

Why Roku’s stock fell despite strong results

The third quarter report was pretty solid. Revenue rose 16% year over year to $1.06 billion. Gross profit rose 30% and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) more than doubled. All three metrics exceeded Roku’s official guidance targets. Roku’s results also beat Wall Street consensus estimates overall.

So the headline numbers looked good, but Roku’s report wasn’t perfect. Of the previous quarter guidance suggested the platform division should accelerate its third-quarter to fourth-quarter sales growth, but Roku management now sees that segment’s year-over-year growth slowing from 15% to 14%. At the same time, the company will stop reporting certain business indicators in the first quarter of 2025, raising fears of reduced financial transparency.

And it should be noted that Roku headed into Wednesday’s report with a head of steam, as the stock had gained 35% in three months. After Thursday’s price drop, Roku stock has returned 6% in three months, right in line with S&P 500 market index.

Is the segment’s slowing growth really that bad?

The slowdown in the platform segment may seem worrisome, but I think it’s a misunderstanding. After all, that division was expected to increase sales by 9% in the third quarter, but instead posted a 15% increase. In my eyes, Roku just gave that boost a little early.

And this increase in sales resulted from several tangible business improvements. Ads on the Roku home screen are more profitable than expected, in part because a successful partnership with expert ad targeting Trade office. Streaming subscriptions billed through Roku’s payment platform also beat expectations, and management spoke of “growing demand” for the company’s digital ad space.

So I’m tempted to double down on my Roku position after this price drop. In any case, business is doing better than expected, and Roku stock should really go up today.

Anders Bylund has positions in Roku and The Trade Desk. The Motley Fool has positions in and recommends Roku and The Trade Desk. The Motley Fool has a disclosure policy.