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Are Roku Shares a Buy After Falling 20% in July?

What happened

Shares of Roku (NASDAQ: ROKU) lost 20.2% of their value in July 2022, according to data from S&P Global Market Intelligence. The media-streaming technology company's stock was doing just fine for most of the month, trading 3.7% higher on the eve of its second-quarter earnings report. Then, Roku reported its financial results on July 28, and share prices plunged 23.1% the next day.

So what

Roku's top line rose by 18% in the second quarter of 2022, landing at $764 million. The bottom line swung from earnings of $0.52 per share to a net loss of $0.82 per share. Your average analyst had expected a smaller loss of $0.68 per share on revenue near $806 million. Looking ahead, Roku's management issued Q3 revenue guidance of approximately $700 million, far below the Street's consensus view of $901 million.

The sharp price correction that followed made some sense, given the company's dramatic underperformance and management's modest projections for next quarter. Roku is experiencing weak advertising sales due to the challenging economic backdrop. The soft guidance was based on the assumption that inflationary pressure and economic uncertainty will continue to keep advertiser spending low throughout the third quarter.

Now what

Well, the rattling investor nerves have calmed down a bit. Roku's shares have already staged a 30% rebound from the post-earnings lows. Today, the stock is trading roughly 3% higher compared to the starting price in July.

Roku isn't exactly dirt cheap at 3.7 times trailing sales, but don't forget that we're talking about a high-octane growth stock here. Growth-investing wizard Cathie Wood has been buying the stock during the earnings-based dip, picking up nearly 500,000 shares on July 30 alone. All told, Roku shares now make up more than 7.7% of the investments in Wood's Ark Invest holdings.

Moreover, investors see some signs of a healthier economy. Over the weekend, the Senate passed a $750 billion budget reconciliation bill called "the Inflation Reduction Act," which aims to leave more money in consumers' pockets over the next decade. Roku investors hope that this more substantial consumer spending base will inspire companies to reverse course on their reduced advertising budgets. Furthermore, the sturdier personal budgets for ordinary people could increase the demand for Roku-powered smart TV sets and streaming devices.

The budget bill isn't a silver bullet to cure every problem in this economy, but it's seen as an essential step toward better days. And even if the recovery takes a while, Roku investors should see generous returns in the long run if they picked up shares during the earnings-related slump -- or even now.

Apart from the deep dip of the last two weeks, you must go back to the early COVID-19 plunge of March 2020 to find Roku stock trading below its current price. Therefore, Roku shares still look like an excellent long-term investment if you believe digital streaming will dominate the entertainment industry in the long run.

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


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