Roku's Platform Business Is Really All About Advertising

After trading as high as $29.80 last week, shares of Roku (NASDAQ: ROKU) have given back much of those gains. The stock is currently down about 10% today near $21.30 as of this writing. That's probably appropriate, as the valuation was looking a bit stretched at those highs, when shares were trading at over six times sales. With the pullback, shares are now trading around 4.6 times sales.

However, whether or not you consider that P/S metric lofty really depends on how you see the business evolving going forward. Roku has historically been a hardware-centric business, and that P/S multiple is extremely expensive for a hardware company. Many hardware companies trade around one to two times sales. If you think Roku will successfully grow its platform business and continue its transition to software and services, then a higher P/S multiple could be warranted due to the fundamentally higher-margin nature of software and services. With that in mind, it's worth digging deeper into the platform business.

Spoiler alert: It's really all about advertising.

Source: Fool.com