Why did Roku’s stock crash despite strong earnings? Flimsy reasons behind the price drop could amount to a buying opportunity.
Shares of media-streaming technology expert Roku (ROKU -22.42%) took a swan dive on Thursday, after the company reported third-quarter results on Wednesday evening. The stock was down by 20.6% at 11:45 a.m. ET.
Why Roku’s stock fell despite strong results
The third-quarter report was quite solid. Revenue rose 16% year over year to $1.06 billion. Gross profit increased by 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’s consensus estimates across the board.
So the headline numbers looked good, but Roku’s report wasn’t perfect. The previous quarter’s guidance suggested that the platform division should accelerate its sales growth from the third quarter to the fourth, but Roku’s management now sees that segment’s year-over-year growth slowing down from 15% to 14%. At the same time, the company will stop reporting certain business metrics 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 full head of steam, as the stock had gained a market-beating 35% in three months. After Thursday’s price drop, Roku’s stock has delivered a 6% return in three months, right in line with the S&P 500Â market index.
Is the segment growth slowdown really that bad?
The platform segment slowdown may sound worrisome, but I think that’s a misunderstanding. After all, that division was expected to grow sales by 9% in the third quarter, but pulled out a 15% jump instead. In my eyes, Roku simply delivered that growth spurt a little early.
And that sales boost sprung from several tangible business improvements. Ads on the Roku home screen are more profitable than expected, partly thanks to a successful partnership with ad-targeting expert The Trade Desk. Streaming subscriptions billed through Roku’s payment platform also came in above expectations, and management talked about “growing demand” for the company’s digital advertising space.
So I’m tempted to double down on my Roku position after this price drop. If anything, the business is running smoother than expected and Roku’s stock really should be rising 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.