Roku (NASDAQ:ROKU) has been one of the hottest tech stocks of 2018, up 35% so far this year and trading this morning at nearly $76 per share, after launching its IPO just over a year ago at $17. What accounts for the spectacular rise of ROKU stock? 

The company’s growth is just part of the reason for the rapid rise of Roku stock price. The company reported $512 million of sales last year and generated $292 million in revenue for the first six months of this year. Best of all, it made a small profit in the second quarter of this year.

But does ROKU stock deserve to have a market capitalization of over $8 billion?

While Roku has some nice new products, including smart TVs, and users of its upcoming devices will be able to access Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Google Assistant, Roku stock price shouldn’t be going up like a rocket, given competition from Amazon.com (NASDAQ:AMZN) and its entire new line of Fire stuff, powered by Amazon’s digital assistant, Alexa.

What is going on?

Burning the Shorts

Like many rising stocks in today’s market, ROKU stock has a secret weapon: its short interest. As of September 14, over 8.7 million shares were being sold short, out of 68.4 million shares outstanding.

Short interest has been rising as the stock has been rallying, creating a “short squeeze.” In this case, it’s long traders who want to buy Roku stock because of the large short interest in the name. These investors know that stocks sold short are borrowed and must eventually be bought back.

We know how Roku’s story will end. Either it will be acquired by a large company that wants its market share or it will eventually disappear as the TV business continues to evolve.

Roku’s ultimate business model, remember, doesn’t involve selling TVs, set-top boxes or HDMI sticks. It involves advertising. Like Google, Facebook (NASDAQ:FB) and AT&T (NYSE:T), Roku measures its success through the Average Revenue Per User, or ARPU, metric. Roku’s revenue has grown because its ARPU and total customer base have increased. In this year’s second quarter, its ARPU was $16.60 and its products were in 22 million households, against an ARPU of just $11.22 and 15.1 million households a year earlier.

“Platform revenue grew 96% year-over-year, with advertising revenue representing the largest driver,” the company’s second quarter letter to shareholders noted. “As TV advertising continues to move to streaming, we believe we can deliver rapid platform growth over a sustained period,” Roku added.

Can Roku Stock Price Continue to Rise?

A May report from research firm Parks Associates showed that Roku had 37% of the streaming market, versus 25% for Amazon, with Google losing share and Apple (NASDAQ:AAPL) holding its own with 15% market share. The key point is that nearly 40% of U.S. homes with broadband internet access now have a streaming player.

At some point, maybe soon, streaming players are going to reach maximum penetration. How well will Roku hold up against the giants when that happens?

There are analysts who are very bullish about ROKU stock. They say that Roku was built as a TV operating system, making it easier for TV manufacturers to support. Roku is also allying closely with Walmart (NYSE:WMT), another potential buyer of the company

The Bottom Line on ROKU Stock

Roku is a momentum stock, and TV streaming is now being adopted by many U.S. consumers, replacing cable in many households, supplementing it in others.

Roku is well-positioned, but its climb only gets steeper from here, and without support from short-sellers, Roku stock price makes no sense. The market cap of ROKU stock is more than ten times analysts’ consensus 2018 revenue estimate of $722 million.

These things adjust in time. The question for those who are looking to buy ROKU stock, and for those who own ROKU stock, is how much time do they have before the adjustment occurs?

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in T and AMZN.