Should You Buy Roku Stock Now?

Traders often commit too early and too much to a stock. ROKU is a momentum stock and that doesn't work.

By Nicolas Chahine, InvestorPlace Contributor

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So far, 2018 has been difficult for the stock markets even though the scoreboard doesn’t show it. Even now, the Nasdaq is still up 8% year-to-date and just 11% off the all-time highs.

Social media stocks like Roku (NASDAQ:ROKU) took it harder than the rest because of a multitude of data breaches. Facebook (NASDAQ:FB) perhaps the most high-profile incident with the Cambridge-Analytica and the 2016 election incidents. And 2018 also saw the birth of GDPR. The European authorities passed stringent rules to heavily penalize companies who have data breaches.

Experts expect that this regulatory theme to expand into other parts of the world. So the worries of cost increases looms over the social media stocks like ROKU, Twitter (NYSE:TWTR) and Alphabet (NASDAQ:GOOGL) in particular. We’ve seen how much FB is spending on their efforts to scrub their content for fake news.

So now, and in addition to all the macroeconomic headwinds, ROKU management has to overextend its security efforts. And, the stock has to contend with investor fears of repercussions. Nevertheless, buyers stepped in and bought the stock up 50% off the August earnings but it didn’t last. Starting Oct. 1, they sold it back down and gave it all back.

Clearly, Roku is a momentum stock. These rarely give investors clear signals for entry or exit points. On the way down, they looked like they were headed into an abyss. Case in point, six months ago, ROKU stock was up 22%. For the past three months, it’s down 22%.

To make matters worse, ROKU is not yet profitable, so it’s hard to buy it on a valuation argument. This is not a young company. It’s been in existence for over 15 years. Thanks to Netflix (NASDAQ:NFLX), streaming video is all the rage and ROKU should be doing better with its plan executions. Judging from the last earnings reaction, that is not the case.

Roku Stock: Buy or Sell?

So is it time to sell the stock? Although it is not a screaming buy, ROKU stock should find support around $40 per share. This has held since June but there also creates risk. If it fails then it could trigger another leg lower to $32 per share. This is not a forecast but a potential scenario of many.

So if I am long the stock still, or if I am looking to short it, I don’t sell it until it loses $40. Conversely, if the equity markets stabilize and ROKU manages to rise above $44.50 I could go long it for a bounce trade to $48. Neither scenarios are guaranteed so that is why I wait for the technical breach in either direction before chasing it.

The macroeconomic conditions are waning but still favor the bullish thesis. But the global leaders are playing chicken with headlines and could ruin it for us. The G20 meetings between China and the U.S. could bring order back to that business relationship. But the threat of 25% tariff in January will cause further downside in equities and ROKU will be lower.

I don’t look to the experts for help. The few analysts who cover it have a “hold” rating on it and it is now trading well below the lowest of their price ranges.

The bottom line for Roku stock is that there is potential in either directions, but I have to trade it one level at a time. It is an established player in a thriving industry, but ROKU needs the general market’s help for its stock to recover Wall Street glory.

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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.


Article printed from InvestorPlace Media, https://investorplace.com/2018/11/should-you-buy-roku-stock-now/.

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