San Jose, Calif.-based Roku, Inc. (ROKU) is a TV streaming platform that operates in two segments: Platform; and Player. According to NPD’s Weekly Retail Tracking Service, ROKU’s operating system was the #1 smart TV OS sold in the United States for the second consecutive year in 2021. However, the stock has an ISS Governance QualityScore of 10, indicating high governance risk.

Shares of ROKU have declined 59.5% in price over the past six months to close Friday’s trading session at $167.48. Furthermore, the stock has declined 26.6% year-to-date.

The bearish investor sentiment surrounding ROKU stock can be attributed to the recent patent infringement dispute and analysts' downgrades.

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

Patent Infringement

On Dec. 15, 2021, the United States International Trade Commission sided with UEI, concluding that certain ROKU products were infringing on UEI patents. ROKU has been banned from importing and selling UEI in the U.S. effective January 9, 2022.TV remote manufacturer Universal Electronics (UEI) had filed a patent infringement case against ROKU, stating that the latter had engaged in unfair trade practices by importing UEI products to the United States.

Regarding this, UEI General Counsel Richard Firehammer said, “The Commission’s ban on Roku imports and sales is an important step in the process of preventing Roku from continuing its unlawful use of UEI technology. Even now, we believe that Roku continues to infringe the very patent it was found to infringe despite its attempts to ‘design around’ its infringement with recent software updates…These updates coincide with degraded Roku product performance, as evidenced by recent media reports and consumer outcry. We look forward to working with U.S. Customs and Border Protection to ensure the Commission’s orders banning imports of infringing Roku products are appropriately enforced.”

Insider Selling

Eight insiders have sold ROKU shares over the trailing 12 months. Insiders have sold approximately $643.49 million worth of ROKU shares over the past year. CEO Anthony J Wood has sold 245,000 shares of ROKU since last month and 165,000 shares in November 2021. The company’s Vice President Scott Rosenberg sold 10,216 shares in November last year, while SVP Stephen Kay sold 1,325 shares in the same month.

Insiders have critical information regarding a company’s operations that might not be immediately accessible to the public. Thus, recent insider sales might indicate internal issues or weak growth prospects.

Executives and managers can legally trade the shares of the company they work for, provided they disclose their purchases and sales to the SEC by submitting forms 3, 4, and/or 5.

Bearish Analyst Sentiment

On Jan. 5, 2022, Atlantic Equities rated ROKU as an “underweight” stock, indicating that the stock might trail behind the broader markets. Shares of ROKU have since declined 27.3% to close Friday’s trading session at $167.48.

Last month Morgan Stanley reiterated its “underweight” rating for the stock. In addition, on November 17, Moffett Nathanson downgraded the ROKU rating from “Neutral” to “underweight.”

Frothy Valuation

In terms of forward non-GAAP P/E, ROKU is currently trading at 108.16x, which is 491.7% higher than the 18.28x industry average. Its 8.04 forward Price/Sales multiple  is 350.6% higher than the 1.79x industry average.

In addition, ROKU’s 68.34 and 46.50 respective forward Price/Cash Flow and EV/EBITDA ratios compare with the 10.44 and 9.66 industry averages Its 8.35 forward Price/Book multiple is 200% higher than the 2.78 industry average.

POWR Ratings Reflect Bleak Prospects

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

ROKU has a D grade for Value and Sentiment and an F for Stability. The stock’s higher-than-industry valuation metrics justify the Value grade. In addition, analysts expect ROKU’s EPS to decline 85.7% in the about-to-be-reported quarter (ended December 2021) and 72.2% in the current quarter (ending March 2022), in sync with the Sentiment grade. And  the stock’s relatively high 1.09 beta accounts for the Stability grade.

Of  67 stocks in the D-rated Consumer Goods industry, ROKU is ranked #54.

In addition to the grades I have highlighted above, view ROKU ratings for Growth, Quality, and Momentum here.

Bottom Line

ROKU has been gaining prominence as a leading TV streaming brand in the United States. However, the stock’s stretched valuation, and recent analyst downgrades are concerning, especially amid the broader market weakness. Thus, we think ROKU is best avoided now.

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

While ROKU has a D rating in our proprietary rating system, one might want to consider looking at its industry peers, Mannatech, Incorporated (MTEX), Société BIC SA (BICEY), and Ennis, Inc. (EBF), which have an A (Strong Buy) rating.

ROKU shares fell $2.48 (-1.48%) in premarket trading Tuesday. Year-to-date, ROKU has declined -27.93%, versus a -3.11% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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