The Move Toward Software and Services Makes Roku Stock a Keeper

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Roku stock - The Move Toward Software and Services Makes Roku Stock a Keeper

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Given its $6 billion market cap, Roku (NASDAQ:ROKU) has floated under many investors’ radar. However, this company is emerging as one of the top leaders in the streaming content battle. While Roku stock has been hit hard amid the market’s pullback and is up “just” 16% in 2018, shares are up more than 170% over the past 12 months.

Talk about a rally!

Shares have lost more than 20% of their value this month though, thanks to the heightened volatility in the SPDR S&P 500 ETF (NYSEARCA:SPY) and the PowerShares QQQ ETF (NASDAQ:QQQ). That could be setting up Roku as a great buy for investors.

While fears of smart TVs and competing products from Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) caused many worries over Roku’s future, the company has proven its resilience. Revenue continues to grow and margins keep expanding as the company shifts to software and services over outright hardware sales.

Whether we’re streaming NBAtv, Hulu, YouTube TV, Netflix (NASDAQ:NFLX), Amazon Prime Video, ESPN+ or one of the many other streaming options, we need a hub. We need a central piece of equipment that let’s us seamlessly go from Netflix to HBO to Prime. Roku is that hub and it’s one reason it continues to do so well.

Valuing Roku Stock

It’s clear that the trend in streaming is in a secular advance, rising from the lower left to the upper right. It’s no wonder Netflix continues to add millions of customers per year. This trend is helping push Roku’s revenue growth up to more than 40% this year, as analysts are looking for ~$723 million in sales for 2018.

In 2019, estimates call for $981 million in sales, giving Roku a chance to hit the coveted $1 billion mark.

On the bottom line, Roku is not yet turning a profit, as it’s expected to lose 11 cents per share this year and another 2 cents per share in 2019. That will keep some investors away from Roku, but it’s growth is hard to deny.

Just this week, Roku received the green light to start selling devices in Mexico again. According to recent research, Roku is making some impressive quarter-on-quarter improvements. The company continues to work its way significantly higher in the Apple (NASDAQ:AAPL) App Store, as well as the Google Play store.

Roku and Google have also partnered to bring Google Assistant to Roku devices. As Google’s market share for streaming flatlines and Roku’s continues to push higher, is a larger partnership brewing? Possibly, and that would be good for Roku.

The company’s free streaming platform, The Roku Channel, is currently the No. 5 streaming channel on Roku devices. That’s important, as this free streaming services helps to drive advertising revenue for Roku, diversifying it away from just hardware sales. As the platform builds out, Roku is shaping up to be the entertainment hub for millions of families and households around the world.

Trading Roku Stock

chart of roku stock price
Click to Enlarge
Source: Chart courtesy of StockCharts.com

Roku stock has taken a pounding, falling from $77.50 to $55 at the lows, and that’s just this month! From top to bottom that’s a 30% beat down and has shaken out a lot of weak hands in the name.

However, some concerning developments are admittedly taking place. For starters, the $57.50 level didn’t hold amid the market’s downturn. While it did get back above it, Roku was quick to break below it first and it would have been much more reassuring to see it hold.

Second and more worrisome is the fact that Roku stock is being rejected by the 50-day moving average. This mark has been support for many months now, and to see it turn to resistance is a bearish development.

That being said, I want to be a dip buyer rather than a rip seller on Roku stock. Specifically, aggressive bullish investors can get a position started near this $57.50 level. However, I would love a dip into the lower $50s, say sub-$55 and specifically around $52.50.

Should a steep fall commence and Roku stock falls to $48, we get an earnings gap fill from August and the 200-day moving average.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL and GOOGL. 

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2018/10/services-roku-stock-keeper/.

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