Tune In to Roku Inc on Any Pullback

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Roku Inc (NASDAQ:ROKU) isn’t a new company. It has been around for nearly a decade, and was one of the first set-top boxes to stream Netflix, Inc. (NASDAQ:NFLX). I’ve been using a Roku for nearly that long in my quest to officially cut the cord with overpriced pay TV.

ROKU Stock: Tune In to Roku Inc on Any Pullback

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ROKU stock, however, is quite new. The company IPO’d back in September for $14 per share, and ROKU’s stock price has soared nearly 200% since that offering. Many analysts have come out as against this lofty valuation. Competition, they argue is heated with Apple Inc.’s (NASDAQ:AAPL) Apple TV, Amazon.com, Inc.’s (NASDAQ:AMZN) Fire TV Stick and Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Chromecast.

Here’s the thing … all of these competitors were either late to the game, overpriced compared to a Roku or too exclusive in their “walled garden” marketplaces.

Roku has none of these problems. Unless you are locked into Apple’s marketplace, you can find content from all of the other competitors right there on a Roku, including AT&T Inc.’s (NYSE:T) DirecTV Now and Sony Corp (ADR)’s (NYSE:SNE) Playstation Vue live TV streaming services.

And they’re cheap for all that diversity. It’s one of the reasons I have three Roku Streaming Sticks in my house right now. A quick Google search reveals that a Fire TV stick will run you about $40, while a Chromecast costs about $32 and an Apple TV is a whopping $180. A Roku Streaming Stick goes for about $34, and you aren’t locked into any one provider’s retail ecosystem.

What’s more, Roku is the current market leader when it comes to America’s living rooms. According to research firm EMarketer, Roku had a 32.6% market share of America’s 150 million connected-TV users last year — ahead of Chromecast (29.9%), Fire TV (26.3%) and Apple TV (19.9%).

But Roku has updated its lineup this year, and is offering deep discounts heading into Black Friday. The new Streaming Stick Plus — a higher-powered version of the older model — will go on sale for $49.99 and offer a free month of DirecTV Now. Roku is also pushing forward with pre-installation of Roku software on many name-brand TVs this holiday season.

With a lower price and wide open ecosystem, Roku should do extremely well this shopping season. Combine these promising prospects with the company’s recent earnings report, and you have a solid fundamental backdrop.

ROKU stock even has a favorable sentiment backdrop, from a contrarian standpoint. Zacks reports that only two of the six analysts following ROKU rate the shares a “buy,” while short interest spiked 16% during the most recent reporting period.

Options traders are also bearish on ROKU stock. The December put/call open interest ratio has risen in the past month to 1.34, with puts dominating the landscape.

ROKU Stock
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And yet, ROKU stock has risen higher in the face of this negativity. Up more than 200% since its IPO, ROKU stock has more than doubled since last week’s quarterly earnings report. The problem here is that ROKU stock is now trading firmly in overbought territory, easily outstripping their 10-day and 20-day moving averages in the process.

As such, a period of consolidation is in order, though not to the degree that sentiment is calling for. A pullback to the $37-$38 region would not be uncalled for to work off this overbought situation, while a drop to $35 would be a heavy “buy” signal.

Returning to ROKU stock’s options outlook, December options are pricing in some extreme volatility. Currently, implieds are expecting a move of more than 27% for ROKU stock ahead of expiration. This places the upper bound at about $49, while the lower bound rests near $28.

2 Trades for ROKU Stock

Put Sell: With implieds through the roof, the best course of action would be to sell option premium on ROKU stock — as any long position would need a considerably large move on ROKU stock to be profitable. The strike of your sold put option, however, would depend on whether or not you want to own ROKU stock. If you are not looking to add ROKU to your portfolio, selling a Dec $27 put is your best bet.

At last check, this put was bid at 58 cents, or $58 per contracts. You keep the premium as long as ROKU holds about $27 through expiration, but will have to pay $27 per share if assigned should ROKU trade below $27 ahead of expiration.

Put Sell (To Own ROKU): If you are looking to own ROKU stock, I’d set a target in the $35-$37 range, depending on what you’re willing to pay to own the shares.

The Dec $37 put was last bid at $5.89, or $589 per contract, and the Dec $35 was bid at $2.95, or $295 per contract. You would end up keeping the premium and being assigned the shares if ROKU trades below your chosen strike ahead of expiration.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/roku-inc-roku-stock-tune-in/.

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