While Roku Inc (NASDAQ:ROKU) got off to a rocky start with its IPO, it was only a temporary thing. Lately, the shares have looked more like bitcoin! Since early November, ROKU stock has skyrocketed from $19 to $47.
Of course, many IPOs are volatile (especially for tech firms). Wall Street needs to get a sense of how to gauge the performance of the company, often by assessing several earnings reports. An IPO also has a small number of shares on the market. This makes it easy for investors to push around the stock.
Oh, and with such a small float, short squeezes are commonplace. This is when short sellers are forced to buy back shares to cover their positions — which drives even more demand.
And something else to keep in mind: The IPO market has not seen many hot deals. So, yes, ROKU stock does stand out.
All this is not to somehow imply that the company is a fly-by-night operator. The fact is that ROKU is an innovator of the rapidly growing streaming market. More impressive, the company has been able to fend off fierce rivals like Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG).
Part of the success is due to the company’s singular focus. Over the years, ROKU has continued to add compelling features and content. But ROKU’s business model is also critical. The platform is essentially an operating system for TV, which should provide for powerful network effects.
The latest quarter highlights the effectiveness of the strategy:
- Revenues jumped 40% to $124.8 million.
- Active accounts rose by 48% to 16.7 million.
- Streaming hours grew by 58% to 3.8 billion.
To achieve this growth, ROKU has been smart to sell its hardware at dirt-cheap prices, which has allowed for acceleration of the user base. It also helps that the streaming trend should last for some time. Just look at the success of Netflix, Inc. (NASDAQ:NFLX). And of course, companies like Walt Disney Co (NYSE:DIS) are investing heavily in their own streaming platforms.
According to comScore, about 51 million US households have used an OTT (over-the-top) service. In the meantime, there has be an erosion of pay-tv and capable options.
Interestingly enough, in the ROKU IPO document, here’s how the company described the opportunity: “Consumers win with TV streaming — they get a better user experience, more entertainment options and more control over what they spend on content. When users want to enjoy streaming entertainment, they start at the Roku home screen where we put users first by helping them find the content they want to watch.”
Seems pretty spot-on.
Bottom Line on ROKU Stock Price
The valuation on ROKU stock is at nosebleed levels. Consider that the shares are trading at nearly 10 times revenues. While the company is growing at a robust rate, it is still not at the kind of standout levels that would justify such a multiple.
Wall Street analysts certainly are not convinced either. Keep in mind that ROKU trades at a 52% premium of the average price target.
Besides, investors should realize that there are some bearish technical factors that could weigh on ROKU stock as well. With the high valuation, there may be a follow-on offering to allow for an infusion of capital or to cash out insiders. If so, the ROKU stock price could take a hit.
Next, in March of next year, the lock-up provision will expire. This will allow current holders to unload their ROKU stock. Now this does not mean there will be massive selling. But for many high-fliers, there is usually considerable pressure, as employees want to take profits.
Granted, in the meantime, ROKU stock could still post gains. Let’s face it, there will probably be a lift from the holiday shopping season. But in a couple months from now, investors may want to think about getting more cautious.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.