Hot off the presses, Roku (NASDAQ:ROKU) stock is jumping more than 25% in early Jan. 7, trading on news the streaming service increased active accounts by 40% to over 27 million in the fourth quarter. That’s great news for owners of ROKU stock who have gone through a very rough ride since September.
To refresh your memory, Roku went public in September 2017 at $14 a share — the high end of its expected range. As is often the case when an initial public offering (IPO) prices at the high end of its range, ROKU stock jumped 67% on its first day of trading to close $23.50. Since then, ROKU’s gained an additional 44% through Jan. 4, a 140% gain for anyone who bought shares in the IPO and is still holding.
Good return, no? Most investors would gladly take an annualized total return of 105%. Of course, the investors who bought in at ROKU’s 52-week and all-time high of $77.57, aren’t likely nearly as cheery about the situation, even with today’s big jump.
Sitting with a 51% paper loss — assuming you’re still holding and the double-digit gains hold — it’s understandable if you’re sad about the situation.
Anyone who’s invested for any serious length of time has been there. You start to question the reasons you bought the stock in the first place. Then, in a Herculean effort to get back to breakeven, you double down, hoping to lower your average cost to the point where you can see a profitable investment in your future.
It’s human nature.
So, what should you do? I’ll deal with both happy and sad investors.
The Happy Investor
The happiest investor in ROKU stock bought shares in the IPO and sold somewhere near the top in September generating an annualized return of more than 315%.
If you did, you followed the old maxim “there’s no shame in taking a profit.” If you didn’t, you might have followed another familiar adage: “Let your winners run; cut your losers quick.”
The point is you’re up handsomely betting on a company that’s still got plenty of growth in the tank, not to mention newfound profitability. Trading at 5.2 times sales and expected to reach full-year profitability by 2020, ROKU stock could be ready to launch a second offensive.
In early December, I reiterated my positive stance on ROKU stock.
“I still believe that Roku will go on to be a very profitable company, much like Netflix (NASDAQ:NFLX),” I wrote. “The advertising dollars Roku generates will increase exponentially once advertisers genuinely buy into streaming ads.”
Long-term, I believe the ROKU stock price will be triple digits, but before it can get there, it’s got to make a profit. Initiatives like the ROKU premium channels is a step in the right direction.
The happy investor ought to buy some more.
The Sad Investor
There’s not much to say to the person who bought above $70 and is looking at an annualized loss of 220%.
If you’re one of those people, hopefully, you bought in a taxable account, so you can sell the shares and apply the capital loss against any capital gains you might have. I know that’s not comforting, but it’s the only silver lining I’ve got.
Now, if you’re contemplating averaging down, you best be prepared for a holding period of at least 24 months because it’s going to take that long for the profit picture to solidify itself.
I’m no technical analyst, but ROKU stock is currently well below its 50-day moving average around $41, which is well below its 200-day moving average of $46.
While ROKU appears to have gained a big head of steam in the last week, to be safe, I’d probably wait until Roku’s stock price pulls above the 50-day moving average before pulling the trigger despite today’s big gain.
The Bottom Line on ROKU Stock
There’s no question in my mind that ROKU stock is a winner in the long-term. That said, today’s gains probably won’t hold. It all depends on the direction of the overall markets. There’s no doubt the news is very positive. However, volatility is the new norm, so if you do buy, be prepared for some big down days to go along with today’s monster gains.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.