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Roku Inc Stock and the Danger of Investing in Popular Tech IPOs

Roku is following a similar script to other high-profile, overhyped tech companies

By Chris Fraley, InvestorPlace Contributor

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Roku Stock Might See $54, but That Is a Very Temporary High at Best

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Roku Inc (NASDAQ:ROKU) isn’t a new story. In fact, it seems to happen every few months. A well-known company with a widely used product files for an initial public offering, excitement around the new stock pumps up the IPO price to a higher-than-expected value, and when the excitement subsides, the stock crashes. It happened with Twitter Inc (NASDAQ:TWTR). It happened with Snap Inc (NASDAQ:SNAP). Now it’s happening with Roku stock.

Granted, “crash” is a strong word for what’s happened to Roku stock of late.

The stock went public in late September at $14, immediately jumped to $23 in its first day of trading, and zoomed as high as $56 in December. If you got in early on ROKU, you’ve made a lot of money in a short amount of time. However, if you were a couple months late to the party, chances are you’ve lost money. ROKU stock currently trades at $37 after falling below three-month support on Thursday.

Is Roku Stock the New TWTR?

A few things have triggered the pullback. The February market correction. The inevitable cooling off of a red-hot stock. But above all, the reality of Roku’s actual fundamentals is setting in for all those who bought in to the company’s promise and high profile. That became more clear after the streaming video enabler released disappointing first-quarter sales guidance last week. Combine that revelation with a continued lack of profits, and suddenly the ROKU stock price doesn’t look so appealing at more than $50 a share and seven times sales.

So, like TWTR, SNAP, Fitbit Inc (NYSE:FIT), GoPro Inc (NASDAQ:GPRO) and countless other profitless companies before it, ROKU stock came tumbling back to earth.

If those stocks are any guide, it might be a while before ROKU recovers. All of those stocks shot up in the days (and, in some cases, months) after their ballyhooed market debuts. Eventually, all of them came crashing down soon thereafter, and are still trading below their first-day-of-trading closing prices.

The common thread? None of them have ever been consistently profitable. Among them, only Twitter is expected to turn a profit this year. ROKU, by the way, is not expected to be profitable this year or next year.

In a way, ROKU stock was cursed by the company being so popular as many people use Rokus to stream Netflix, Hulu or Amazon Prime on their TVs.

That hype helped push Roku to price at its IPO to the high end of its expected range ($14), and convinced early investors to come pouring in right away, pumping Roku stock up 68% in its first day of trading. From the get-go, ROKU was overvalued.

Avoid Roku Stock Until Profits Arrive

As a company, there’s a lot to like about Roku. It is certainly a very now company. The cord-cutting masses prefer to pay less for their favorite TV shows, movies and live sports. Buying a Roku is one way to do that.

And now, Roku has partnered with many big-name television manufacturers  to have its operating system already imbedded and ready for use when people buy the TVs. It also offers its own streaming services, DirecTV Now and Hulu Live, and sells ads that air on its free Roku Channel.

The business model is strong. Sales are growing. Yet profits remain elusive. Until they come, at least on a consistent basis, the recent history of overhyped tech IPOs tells us ROKU isn’t worth the investment. At least not yet.

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


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/rook-stock-danger-popular-tech-ipos/.

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