Roku Inc. shares have lagged the S&P 500 in 2021, dropping 26 percent year-to-date.
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.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 percent over the past three years, suggesting the stock is priced at the high end of its historical valuation range.
