On Wednesday, Roku (NASDAQ:ROKU) reported earnings that beat estimates. Yet the stock price was heavily penalized the next day. Although I believe ROKU’s management will successfully take the necessary steps to grow the company profitably in the long run, I do not think Roku stock will repeat its past exponential up move in the next few months. Thus, investors should not rush to hit the buy button in ROKU shares yet.
Rich Valuation in Tech Stocks Are Beginning to Worry Investors
The recent selloff — especially in the tech sector — may be an important signal that investors are no longer willing to be exuberant with technology stocks and their rich valuation numbers. And investors’ harsh reaction to ROKU earnings call might be an example of their more cautious thinking in the near future. On Thursday, the day after it reported, ROKU stock closed down over 20%.
The streaming device platform Roku, which also is the leading connected TV manufacturer in the U.S., has been a darling of Wall Street since its IPO in 2017. ROKU stock price has gone up from $17 to a high of $77 in just over a year, benefiting from the disruptive internet-entertainment revolution that has made viewing more personalized. Yet the current sentiment seems to have shifted on ROKU stock and investors are left wondering what is next for Roku share price.
Is the Fundamental ROKU Story Still Intact?
Before the earnings call, long-term ROKU bulls happily highlighted many of Roku’s competitive advantages, starting with ROKU’s share of smart TVs sold in the U.S. and a projected annual growth of over 30% in the rapidly-expanding over-the-top streaming market.
However, Roku bears are rightfully concerned that ROKU is still losing money — at 9 cents per share, and its guidance points to further losses in the next quarter, too. Unlike Netflix (NASDAQ:NFLX), Roku does not generate content. This is another reason why some investors worry that Roku’s revenue growth through subscriptions may simply be not enough to justify the rich valuation of about 170 times earnings.
Roku’s earnings call showed that platform revenues came in less than $3 million in expectations — a big question mark regarding future revenues. ROKU is also facing increasing competition from tech rivals such as Alphabet‘s (NASDAQ:GOOG,GOOGL) Chromecast, Apple’s (NASDAQ:AAPL) Apple TV, and Amazon’s (NASDAQ:AMZN) Fire TV.
So Is It Time to Invest in Roku Stock?
The answer depends on your evaluation of the fundamentals of the ROKU stock as well as the noise surrounding the company at this point.
After the recent tech selloff, as well as the fall in its share price following its earnings calls, Roku stock has suffered from a damaging technical picture. Its technical chart looks rather weak, and it is pointing to more choppy action in the short-term, possibly between $40 and $50. Long-term technical chart looks even weaker, suggesting a potential fall to the low $30’s level. A further pullback to below $40 would make ROKU shares quite attractive again. ROKU stock’s 52-week price range has been $18.56 (Nov. 8, 2017)-$ 77.57 (Oct. 1, 2018).
If you already own ROKU stock, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3-5% below the current point. If you are looking for an entry signal to buy ROKU shares, both from a technical chart perspective and based on fundamental metrics and valuation, I am not expecting the stock to make a significant leg up any time soon. You may want to wait for the release of the next quarterly statement in early 2019 to re-evaluate the balance sheet and the fundamentals.
If you are willing to stay in the ROKU stock 4-5 years, I trust that the management will work through the main issues surrounding the health of the company and the stock will reward patient investors handsomely. Roku may also find itself in the middle of a bidding war from the competitors to be acquired.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
