Why Investors Should Wait Before Pulling the Trigger on Roku Stock

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ROKU stock - Why Investors Should Wait Before Pulling the Trigger on Roku Stock

Source: Roku

Roku (NASDAQ:ROKU) stock endured quite a fall. The stock suffered during the autumn as the China trade war left investors questioning whether ROKU stock could support a premium valuation. As a result, Roku endured the most dramatic selloff it has seen in its short history.

Now, the ROKU stock price stands at around $30 per share. Although this looks like an attractive buy point, I would urge caution. ROKU remains a long-term winner. However, investors should stay cautious on account of compressing multiples.

To be sure, ROKU stock remains a long-term winner. Roku’s role as the neutral arbiter between the different streaming services will only strengthen as Apple (NASDAQ:AAPL) looks to enter the field and as Disney (NYSE:DIS) prepares to launch its long-awaited Disney+ service. Investors should also remember the advertising niche Roku has created in the streaming space. Although they will likely not become ad powerhouses at the level of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) or Facebook (NASDAQ:FB), we can expect Roku to dominate ads in its niche.

Trade War, Falling Multiples Hurt ROKU

That said, ROKU has dropped for good reasons. Unlike many tech stocks punished during the last three months of 2018, the U.S.-China trade war has directly affected ROKU stock. TCL, a Chinese supplier of Roku-equipped TVs, announced that they would shift their focus to semiconductors and displays.

Also, in many writings, I’ve talked about what I call the “vision premium,” an inflated multiple that often benefits visionary companies. ROKU had benefited from such a valuation. However, in an environment of falling stock prices, investor willingness to pay such premiums fades. If high-flyers such as Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) feel these effects, few should expect ROKU stock to also escape.

Still, a 60%-plus drop in the ROKU stock price naturally makes prospective buyers wonder whether now is the time to open a position. One of the more interesting pivots on ROKU has come from Needham & Company. In mid-December, Needham cut their price target from $85 per share to $45 per share.

However, this report stands out for what did not change — Needham’s rating on ROKU stock. Despite the dramatically lower estimate, they maintain a buy rating on ROKU. ROKU stock remains Needham’s top pick for 2019 due to the growing importance of streaming and the corresponding ad revenue that will come with the ever-increasing customer base. Despite the loss of TCL, Roku’s edge in the low and mid-range television market remains secure.

Look for Key Catalysts on ROKU Stock

Despite Needham’s assertions, I would look at two events when deciding when to buy. For one, we will likely get a clue regarding the state of that market early in the new year when CES 2019 begins on Jan. 8. Speculation surrounds the adoption of Roku OS 9, which the company released last fall. CES should reveal the extent of Roku OS 9 as many companies release their latest televisions. This could become a catalyst that could help launch a turnaround in ROKU stock.

Look for Key Catalysts on ROKU Stock

Even if CES fails to inspire Roku investors, the charts may indicate a buy point. The stock formed a bottom at $26.30 per share before bouncing back slightly. If this point becomes a double bottom, that would indicate that the pain has ended for now. On the upside, if the signal line crosses zero on the MACD indicator, it should also confirm that a sustained turnaround has begun.

ROKU now trades at under five times sales. Also, most believe the company will reach full-year profitability by 2020, or possibly sooner. This should help Roku maintain its moat — and what’s left of its vision premium.

The Bottom Line on ROKU Stock

ROKU stock will serve investors well in the long run, but for now, investors need to mind the falling vision premium. Like most of its high-flying tech peers, ROKU has fallen hard over the last three months. Now, with a heavily discounted price, many wonder whether they should buy at these levels.

Even when Roku begins to earn a profit, and by extension a price-to-earnings (P/E) ratio, that multiple will remain high for years to come.

However, with ROKU stock trading at under five times sales, we see indications that the multiple compression could near its end. If chart indicators infer the end of Roku’s drop, I think investors should begin to buy.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 


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