5 Top Stock Trades for Tuesday: FB, TLRY, OSTK >>> READ MORE

Roku Stock Is a Long-Term Winner Sprinting Into Earnings

Roku stock is a long term winner, but earnings are a high-risk, high-reward situation

By Luke Lango, InvestorPlace Contributor

http://bit.ly/2U0TM3T

Roku (NASDAQ:ROKU) was once heralded as a streaming company following in the footsteps of Netflix (NASDAQ:NFLX) and pioneering a new era of streaming advertising. But during the late 2018 market selloff, investors forgot all about that growth narrative, and Roku stock dropped from nearly $80 to below $30 in just two months.

Buy Roku Stock Because This Company Is a Long-Term Winner
Source: Roku

That drop was a buying opportunity. Roku pre-announced fourth-quarter streaming numbers in early January. That announcement reminded investors that this is a growth company. Roku stock bounced back. Now, it sits at $54, and has essentially doubled in roughly two months.

Earnings are due after the bell on Thursday, 2/21. The numbers should be good (the pre-announcement was strong). The guide should be good, too, given positive trends in the streaming market. But, there is significant uncertainty when it comes to how Roku stock will react to those earnings.

On one hand, you have a growth stock that is just getting its groove back, has a long ways to go before eclipsing all time highs, and could rally towards those all time highs on good numbers. On the other hand, you have a stock that has doubled in two months, is in technically overbought territory, and could be due for a natural pullback on even good numbers.

Which one will win out? No one really knows. As such, the near term outlook for Roku stock is uncertain.

But, the long term outlook here remains robust. In the big picture, this is a company rapidly transforming into the cable box of streaming, a position which warrants Roku stock heading significantly higher in the long run. As such, long term investors would be wise to hold through what will be a volatile earnings report, and buy on any material weakness.

Earnings Provide Significant Volatility

Earnings reports always inject a significant amount of volatility into Roku stock. The company always tops estimates on both the top and bottom lines. But, some times the stock rallies in a big way. Other times, it drops in a big way.

That is simply the nature of an early-stage, high-growth, still-small, freshly public company like Roku. There’s a lot of noise in the first few earnings reports for such companies because investors are trying to see if the company really is a long-term winner. Any clues that they are lead to a big rally. Any clues that they aren’t lead to a big drop.

Roku stock is no different. Right now, investors are trying to figure out just how big Roku can become in the streaming market. We all know the streaming market will be large. We also all know that they are a lot of competitors in this market. Roku is leading the charge on the streaming service aggregation ecosystem front. This has been the case for a while. But, investors are concerned that without much of a moat, bigger competition can come along and steal Roku’s share rather easily.

As such, investors are desperately seeking for clues as to whether Roku will become a Netflix-like success, or a GoPro (NASDAQ:GPRO)-like flop.

Right now, the success story is taking hold over the flop story. The pre-announced Q4 engagement and streaming numbers were very strong. Active accounts rose 40% year-over-year. Streaming hours rose by nearly 70%. Ever since that report, investors have bid up Roku stock on the assumption that those strong engagement numbers will lead to strong financial numbers, and a healthy first quarter guide.

That may very well happen. But if history tells us anything, it’s that big rallies in stocks like Roku stock are usually followed by natural pullbacks on even good news. As such, while Q4 numbers will be good, there is a significant amount of uncertainty regarding how Roku stock will react to those numbers in the near term.

The Long-Term Outlook for ROKU Stock is Healthy

In the big picture, the near-term reaction to Q4 earnings is largely irrelevant. That’s because the trends remain in place for this company to ultimately become the cable box of the streaming world one day, and in so doing, turn into a $10 billion-plus company.

In a nutshell, the big-picture bull thesis on Roku stock is as follows. Every customer is pivoting to streaming due to enhanced convenience and lower cost. Every company is pivoting to streaming, too. That means both demand and supply in the streaming market are simultaneously growing and becoming increasingly diverse, further implying that it will become harder for consumers to discover suppliers, and for suppliers to reach consumers. As this trend plays out over the next several years, there will be a huge need for someone to aggregate all that streaming supply, organize it, curate it, and deliver it to consumers in a frictionless manner so as optimize consumer discovery and supplier reach (think the cable box for streaming).

That someone is Roku. Sure, there are multiple players in this market. But, Roku is the head-and-shoulders leader in both streaming devices, and smart TVs. That’s big, since network effects are now in play. The more consumers have a Roku device or Roku smart TV, the more Roku becomes the norm for accessing streaming services. The more it becomes the norm, the more consumers will flock to it. Further, the more consumers flock to Roku, the more Roku becomes indispensable to streaming service suppliers in this market since the Roku ecosystem has increasingly wide and irreplaceable reach.

Putting it all together, it looks like Roku is a long-term winner in the making. As such, with a market cap of just $5 billion today versus a $150 billion-plus market cap over at Netflix, Roku stock should head significantly higher in a long-term window. But, the stock has doubled over the past two months in anticipation of strong Q4 numbers. As such, buyers here should proceed with caution.

As of this writing, Luke Lango was long ROKU and NFLX. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/02/buy-or-sell-roku-stock-earnings/.

©2019 InvestorPlace Media, LLC