1 Warning Before You Buy This Cathie Wood Stock

Ark Invest's focus on owning innovative and disruptive businesses has made its founder and CEO Cathie Wood a closely followed investment professional. Someone looking to put some money into the stock market might follow her trading moves to find potential investment ideas.

In the Ark Innovation ETF, the company's flagship fund with $5.4 billion in assets (as of Dec. 9), Roku (NASDAQ: ROKU) is one of the top positions. It represents a sizable 9.3% of the holdings in the exchange-traded fund (ETF).

The streaming stock is currently trading 83% off its peak price, and you may be eyeing the business as a possible investment candidate. If so, pay attention to this one warning before you buy the stock.

Roku's reporting change

Investors rely on companies and their management teams to report key metrics so they can better gauge how these businesses are performing. In Roku's case, it has consistently revealed how many active accounts it has and average revenue per user (ARPU) in any given quarter.

This makes it easy to see how much growth there has been. As of Sept. 30, the company had 85.5 million active accounts, up 165% from 32.3 million just five years ago. Obviously, a higher figure is better, as it indicates further penetration of the Roku smart-TV operating system. As we look ahead, though, investors will no longer get this information.

"Beginning with our Q1 2025 earnings results, we will no longer report quarterly updates on Streaming Households and, by extension, ARPU," the Q3 2024 shareholder letter reads.

And during the earnings call, CEO Anthony Wood explained management's thinking behind the decision, "We don't believe streaming households growth is representative of platform revenue growth." A big part of this is due to the differing monetization rates across markets. For example, the U.S. generates the bulk of revenue, but account growth is mainly coming from international markets.

This decision from Roku echoes a similar move taken by industry peer, Netflix (NASDAQ: NFLX). The top streaming service with 283 million global subscribers announced in April that it would stop reporting quarterly membership figures and average revenue per member starting in Q1 2025. Only when important milestones are reached will investors know the customer count.

Be skeptical

However, Netflix can make a better case for its decision as the stock has surged nearly 200% in the last five years. Not only is it finding ways to grow revenue by double-digit percentages with new content offerings, a successful ad tier, and strict password-sharing rules, but its profitability has improved significantly in recent years. The business is projected to post a stellar 27% operating margin in 2024, more than doubling pre-pandemic levels. Netflix is also generating billions in free cash flow annually, a sign that its operations are scaling up in a lucrative manner.

Roku, on the other hand, isn't firing on all cylinders. Its shares have tanked 43% in the past five years. The business hasn't consistently been profitable, and its growth has slowed due to stiff competition.

In that context, knowing how many active accounts Roku has is an essential piece of information for investors. This is especially true because Roku is still in growth mode, aiming to bring on as many customers onto its platform as possible. Without this data point, investors will be left in the dark.

Reading between the lines, it's possible Roku's executive team believes active account growth will be weaker going forward. Otherwise, why not show off a figure that should be beneficial to investor sentiment?

To be clear, I still think Roku deserves a closer look from investors. The company benefits from the streaming secular trend, and it has a leading market share in the U.S. Additionally, the current price-to-sales ratio of 3.1 is 67% below the stock's historical average.

Investors who want exposure to the industry might find this situation compelling. However, it's important to accept the possibility of more muted growth in the years ahead.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Roku. The Motley Fool has a disclosure policy.