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Roku Q2 preview: Can shares get back on track?

JZacks Consumer Discretionary sector has fallen year-to-date, losing more than 30% in value and significantly underperforming the broader market. However, the sector has posted a return of 2.6% over the past month, slightly better than the 1.4% return of the S&P 500.

The chart below illustrates the sector’s performance against the S&P 500 over several time periods.

Image source: Zacks Investment Research

The relatively strong performance of equities over the past month could indicate that the sell-off is over.

A resident company in the sector, Roku ROKU, is expected to report quarterly results on July 28e (Thursday) after the end of the trading session. Roku is a massive entertainment giant and is the leading provider of TV streaming platforms in the United States based on total hours streamed.

Let’s take a look at how the streaming giant is shaping up ahead of its quarterly release.

Performance and valuation of shares

It’s been anything but pleasant for Roku investors over the past year, with shares losing more than 80% of their value. Simply put, it was a fall from glory for Roku stocks.

Zacks Investment Research
Image source: Zacks Investment Research

Even in the past month, stocks have lost nearly 15% in value.

Zacks Investment Research
Image source: Zacks Investment Research

The less than favorable price action is undoubtedly a concern, indicating that the sellers have completely controlled Roku shares, pushing the bulls out of the arena left and right.

Additionally, Roku’s stock may be overvalued, as indicated by its Style Score of a D for Value.

The company’s 3.2X forward price-to-sales ratio is well below its five-year median of 9.9X, but represents a staggering 98% premium to its Zacks sector.

Zacks Investment Research
Image source: Zacks Investment Research

Quarterly estimates

Analysts have been bearish for the quarter to report over the past 60 days, with two negative estimate revisions hitting the band. Additionally, the Zacks Consensus EPS estimate of -$0.77 reflects a disheartening 250% drop in quarterly earnings year over year.

Zacks Investment Research
Image source: Zacks Investment Research

However, the company’s revenue is in much better shape, with an estimated quarterly revenue of $804 million representing a solid double-digit increase of 25% in quarterly revenue year-over-year. The chart below illustrates the company’s revenue on a quarterly basis.

Zacks Investment Research
Image source: Zacks Investment Research

Quarterly performance and market reactions

Roku has consistently topped Zacks Consensus’ EPS estimate, recording nine bottom line beats in its previous ten quarters. However, the company’s only failure came during its last quarter.

Top tier results have also been rock solid – Roku has recorded eight top tier beats in its last ten quarters.

Prepare for volatility after the quarterly report; in the company’s last four EPS beats, shares have fallen three times by at least 14%.

Conclusion

Roku ROKU shares are on the receiving end of one of the deepest valuation declines we’ve seen in the past year. Moreover, the shares look high in terms of valuation and earnings are expected to decline by a triple-digit percentage.

However, the company has consistently reported results above and below expectations, and revenue is expected to show solid growth.

Heading into the quarterly report, Roku is currently a Zacks Rank #3 (Hold) with an ESP score of -5%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.