It’s better to be safe than sorry. That’s my ultimate assessment regarding my prior write-up for Roku (NASDAQ:ROKU). Among a wave of disappointing initial public offerings, ROKU stock stood out not only for the company’s relevant business but also for its sheer performance. Yet I felt that shares had risen too quickly, and that it was time for a correction.
I wrote the piece in the second half of August, so in hindsight I was wrong, at least temporarily. The ROKU stock price amassed a rip-roaring 28% gain from the time I disclosed my cautionary take.
Admittedly, I hate incurring such an opportunity cost, especially when it involves strong double-digit profits. At the same time, this spike also affirmed my pensiveness.
A Closer Look
The October selloff damaged most publicly-traded companies, but it severely impacted the stock price. The streaming-equipment provider fell nearly 26% in that month, and dropped almost 29% in November. This month isn’t looking too hot either, where ROKU is currently staring at a 19% loss. Year-to-date, shares are down 33%.
Aside from what I felt was an unsustainable technical rally, fundamental challenges have pressured ROKU. My biggest concern is the unconvincing growth rate in monthly active users (MAUs). On the surface, this sounds like a strange comment to make. On a year-over-year basis, Roku Inc.’s MAUs are off the charts.
But on a sequential basis, the growth rate is down to single digits, where competitors Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) reside. The difference is that these two stalwarts are deeply-established companies. Roku, with its smaller base, should see much higher growth.
It was the same story for its most recent third-quarter earnings report. Although ROKU stock fell on weak guidance, MAU growth was sequentially not impressive.
ROKU Stock Entices
But with so much negativity baked into the ROKU stock price, do speculators have a viable shot at some upside? While I’m still concerned about some of the fundamentals, I think the company has become attractive again.
For one thing, the volatility in ROKU might be starting to fade. More important, this deceleration is occurring near its long-term support line, which stands at around the $30 level.
Recall that in early spring of this year, the bears attempted to push ROKU below this key psychological threshold. Fortunately for shareholders, the markets responded positively to the company’s Q1 2018 earnings report.
Therefore, we’re likely at the tail end of this technical tsunami, which opens the door for risk-tolerant speculators.
On the fundamental side, I believe broader industry tailwinds may benefit Roku more than its well-resourced competitors. For instance, Roku is simply focused on its streaming-equipment business. Unlike Amazon, they’re not trying to take over the world and thus do not worry about the world’s overhead.
As far as Netflix is concerned, the streaming giant has also become a content powerhouse. While that achievement aligns with their longer-term strategy, this also represents an expensive endeavor.
It’s true that the cord-cutting phenomenon benefits all streaming-related organizations. However, Roku is essentially a pure streamer. When more people cut the cord, I expect the ROKU stock price to rise higher relative to AMZN or NFLX.
Plus, I can’t help but notice that folks are a little shaky about the economy. If God forbid we enter a recessionary period, all streaming companies should benefit. But here again, Roku has the edge due to its plethora of options and no monthly fees for basic service.
The ROKU Stock Price Is Right
My shift back towards the bullish end of the spectrum doesn’t dismiss Roku’s broader challenges. I’m still concerned about MAU growth. Management should push harder to drive up the numbers. Also, the competitive threat is an ever-lurking cloud.
But another adage states that no company is perfect. As an investor, you’re paying for the most favorable balance between risk and reward. In that context, the stock price is just right.
Shares have lost more than half its market value since the beginning of October. Yet the positives remain the same. Roku offers compelling, scalable products and services in an extremely-relevant industry.
I didn’t like ROKU at $60, let alone almost $80. But at $35 or below? You don’t have to be a risk-taker to see the deal in that!
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
