Roku (NASDAQ:ROKU) will release its third-quarter earnings on Nov. 3 after the stock market close. This could be a bellwether for how well its crucial Christmas season turns out. Investors will be looking carefully to see if the West coast shipment delays are having any effect on its ability to deliver inventory to stores. If so, this could cause another downturn in ROKU stock.
In fact, the company has been showing very good growth so far this year. As a result, ROKU stock peaked at a closing high of $479.50 as of July 26 but has been drifting down ever since.
The stock’s decline seems to have reached a trough on Oct. 4 at $296.86 per share. Since then ROKU stock has been floating up, closing last week at $321.88.
Impact from the West Coast Shipment Delays
However, if the Q3 earnings start to show some effects from the shipping delays on the West coast, analysts may downgrade their earnings forecasts. That could have a deleterious effect on the company’s stock especially if the crucial Christmas season bears the brunt of lower earnings.
One way this could happen is if the company shows that its Q3 earnings growth has been lower than expected. This might be the result of lower inventory volumes or else higher cost of goods sold (COGS) from elevated shipment costs.
In addition, analysts may review very carefully the actually inventory levels on the company’s balance sheet or those of its suppliers. If they are not at historical levels given the upcoming Christmas season, analysts may sound warnings about the effect this will have on Christmas season sales.
For example, Bloomberg recently posted an article with this alarming title: “Christmas at Risk as Supply Chain ‘Disaster’ Only Gets Worse.” The article wrote that out-of-stock shortages could put retailers at risk. The article quoted a CEO of a toymaker indicating he had never seen it so bad. Retailers are having a difficult time filling their shelves.
If this persists up until the Christmas season, then there will be lower inventories of Roku TVs sold. That will directly impact Roku’s sales and earnings growth in Q4.
Recently Roku has run into a problem with YouTube TV, which is owned by Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The two cannot seem to reach an agreement on how search results and related advertising is handled. This might be a harbinger for troubles it could end up having with other advertisers.
Where This Leaves Roku Stock
So far, analysts have actually been raising their 2021 and 2021 estimates for both revenue and earnings. According to Seeking Alpha’s earnings revisions tab. revenue estimates for 2021 have risen 0.07% (7 basis points) for 2021 in the last month. And over the last 3 months, analysts have taken revenue estimates up by 3.51 percentage points.
The same is true for 2022. Their one-month trend is up 24 basis points and over the last three months revenue forecasts are up by 2.82 percentage points.
In other words, they don’t seem to be concerned yet about supply chain issues. That could change, as I have pointed out if ROKU starts to report an impact during their Q3 earnings report.
What to Do With ROKU Stock
I suspect that there will be an impact, albeit however slight, in the Q3 earnings from the shipping crisis. That may roll over into a much higher effect with Q4 earnings. This could be the reason why ROKU stock has come off of its highs as the market has been anticipating issues along these lines.
Therefore, the most prudent approach would be to hold off buying more ROKU stock, despite the company’s robust earnings outlook over the next several years. For example, analysts still see revenue rising by 79% to over $5 billion by the end of 2023 over this year’s revenue forecasts of $2.84 billion, according to Seeking Alpha.
But if they foresee shipping delays for ROKU TVs in store shelves by Christmas, these same analysts could lower these revenue projections and growth rates. It seems best to wait, even though that might have the risk of seeing ROKU price fly higher.
On the date of publication, Mark R. Hake did not hold any positions (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.