Is Roku's Stock Overvalued Or Undervalued?

Roku Inc ROKU shares have lagged the S&P 500 in 2021, dropping 26% year-to-date.

Roku’s stock has had a wild ride in recent years, but investors may be wondering whether there’s any value in Roku shares after the sell-off.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value.

For comparison, the S&P 500’s PE is currently at about 29.4, nearly double its long-term average of 15.9. Roku's PE is 133.3, more than four times the S&P 500 average as a whole.

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Growth: Looking ahead to the next four quarters, the S&P 500's forward PE ratio looks much more reasonable at just 21.4. Roku's forward earnings multiple of 168.6 is more than seven times higher than the S&P 500’s, making Roku look overvalued.

Roku’s forward PE ratio is also more than seven times higher than its communication services peers, which are averaging a 21.3 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 1.0; Roku’s PEG is 2.07, suggesting Roku is still significantly overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.2, well above its long-term average of 1.63. Roku’s PS ratio is 14.3, more than four times higher than the S&P 500 average as a whole. Roku's PS ratio is also up 82.8% over the past three years, suggesting the stock is priced at the high end of its historical valuation range.

Finally, Wall Street analysts see value in Roku stock over the next 12 months. The average analyst price target among the 25 analysts covering Roku is $380, suggesting 55% upside from current levels.

The Verdict: At its current price, Roku stock appears to be overvalued based on a sampling of common fundamental valuation metrics.