Roku Inc (NASDAQ:ROKU) stock exploded after its first earnings report. Contrary to my prediction, ROKU stock moved higher, rising as much as 130% in one week. High revenue growth and subscriber numbers impressed Wall Street as the company lost less money than predicted.

Still, with substantial dangers remaining, I stick by my prediction to avoid this stock.

Roku Made a Great First Impression

To be sure, Roku made a great first impression. Its earnings debut saw the ROKU stock price soar by over 26% after hours. Revenues grew by 40% and its gross profit by 92%. Quarterly earnings per share, though still a loss, came in at a 10-cent per share loss, well ahead of the expected 19-cent per share loss.

ROKU has shined on platform revenue. While player revenue only posted a small gain, platform revenue rose over 137%! Overall revenue for 2017 is expected to come in at $500 million, an increase of more than 25% from 2016. Its business concept of selling Roku boxes for little more than cost and then running ads is quite innovative.

This strategy increased the number of Roku accounts by 48% in the last year alone. This bodes well for the company advertising and content distribution drive about 75% of the profits.

With only a 7-week trading history, it’s too early to establish trends, but this report dazzled investors. The company has further bolstered its reputation with announcements since the IPO. Roku announced the acquisition of Dynastorm, which specializes in multi-room streaming audio. It also announced a $20 on its new Roku Streaming Stick for Black Friday. This move will certainly grow the subscriber base further.

Losses and Competition Remain Concerns

Little doubt exists that the earnings report improved the outlook of ROKU stock. Unfortunately for current ROKU investors, most of the issues pointed out in my previous article continue to exist. Profitability remains years away. EPS forecasts show analyst do not predict profitability until at least 2020. And that EPS forecast for 2020, 34 cents per share, places ROKU stock at well above 100 times 2020 earnings.

Further, the company still lacks a competitive moat. Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT) all offer streaming products.

The recent addition of multi-room audio streaming could widen the company’s moat somewhat. However, each of these entities has at least 200 times the market cap as Roku. Hence, if so motivated, each of these companies could crush ROKU.

Or, since Roku has a market cap still below $4 billion, one of these companies could buy it out. The buyout obviously benefits holders of ROKU stock more, but that result cannot be guaranteed. With the move into multi-room audio and the large subscriber base, ROKU could become a buyout candidate for one of its four large-cap competitors. If one prefers the stock market to a game at the casino, this might make good use of one’s gambling budget.

The stock remains a gamble in other respects. An issue with buying now lies in timing a buy of the company stock. Since the earnings announcement, the ROKU stock price rose by 55% on Nov. 9 and has experienced daily double-digit moves since, with a fall on Nov. 14. Predicting a profitable entry point under these conditions remains difficult without a crystal ball.

Final thoughts

Despite impressive gains recently, ROKU stock remains difficult to recommend. Their first earnings report scored big on first impressions. The lower than expected loss coupled with large revenue gains and a creative acquisition that could expand the stock’s moat bolstered investor confidence.

However, profitability remains years away, and the company still has to compete with rivals that are 200 or more times the size of ROKU. With its small size, continued losses and weak moat, Roku likely has a limited time as an independent company.

Whether Roku ends its existence by competitive defeat or buyout remains a coin toss. Under current conditions, taking a position in ROKU stock should be a bet, taking with one’s good luck charm in hand.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.