Shares of Roku (NASDAQ:ROKU) have been on a roller coaster ride over the past several months as Wall Street’s consensus opinion on the streaming maker has swung from strongly bullish to strongly bearish back to strongly bullish. Since May of 2018, ROKU stock has gone from $30 to $80, back to $30, and is now on the ascent, closing in on $80.
In the big picture, the bull thesis has significantly more merit than the bear thesis. Roku is gradually transforming into the streaming box for the over-the-top television world, as it does so, is turning into an extremely valuable company with huge user growth, revenue growth, and profit growth potential. As such, it makes sense that Roku stock has rebounded from a late 2018 to sell-off, to now trade at all-time high levels once again.
Yet the law of financial gravity posits that stocks don’t go up in straight lines forever. The move in Roku stock over the past two and a half months can best be described as a straight line up. In late 2018, this was a sub-$30 stock. Today, it trades north of $70. Net net, the stock has rallied more than 160% since Christmas.
That’s a huge gain and it puts Roku shares both in overbought territory and up against longer-term resistance levels. So, the technicals right now are saying that ROKU stock is due for a breather.
Importantly, though, Roku Inc. stock is not fundamentally overvalued, considering the company’s long-term growth potential. As such, while turbulence is on the horizon for ROKU shares, such turbulence should be viewed as nothing more than an opportunity to add exposure for the long haul.
Roku is Technically Overbought
Roku stock has come very far, very fast. How far, how fast? Investors should consider the following:
- It’s up more than 160% in a little more than two months.
- It is now just 5% off all-time highs, which provides a multi-month level of technical resistance.
- The stock is 55% above its 50-day moving average, and that’s a record divergence.
- ROKU stock is also 45% above its 200-day moving average, and that’s the biggest divergence since late 2018, right before the shares plummeted from all-time highs.
- Roku’s trailing price-to-sales multiple is now north of 10x, which has been a historically unsustainable multiple for this stock.
- The relative strength index (RSI) on Roku stock is at 80, which is both in overbought territory (typically above 70) and about as high as the RSI has ever been.
Overall, the numbers don’t lie here. Roku stock has come very far, very fast, and is now in technically the overbought neighborhood with an arguably stretched valuation. That means near-term upside looks unlikely. Instead, it is far more likely that ROKU stock trades sideways to down over the next several weeks as it consolidates and allows for the moving averages to catch up.
Once those moving averages do catch up, that will be the time to buy, because in the long run, Roku stock is a winner.
It’s Also Fundamentally Undervalued
What makes Roku stock a long-term winner? Consider these data bits:
- Roku has only 27 million accounts in a market that comprises hundreds of millions streamers globally, and Roku is growing those users at a consistent 40%-plus clip.
- Average revenue per user (ARPU) is closing in on $20 and still growing at a 30%-plus pace with significant room for improvement in the long run through expanded video ad inventory in the rapidly growing OTT video ad market.
- Gross margins in the company’s high-growth Platform business are north of 60%, and have room to hit 70%-plus in the long run thanks to ARPU improvements.
- That high-margin Platform business will eventually account for 80% or more of total revenue.
- Roku has a 50%-plus opex rate that will decline with revenue scale, as it does at every big growth tech company.
Overall, the numbers here don’t lie, either. Roku has a big and rapidly growing user base that has the potential to become way, way bigger over the next several years as the streaming market becomes increasingly large and diverse (these two things increase the demand for Roku, as I wrote last month). It is monetizing those users at a high rate, and has lots of room to increase that rate as they grow ad inventory amid a secular shift toward OTT video advertising. Gross margins are high. The opex rate is reasonable and will fall.
In the big picture, it isn’t hard to see Roku as a 100-million-plus user platform one day, with $30-plus ARPU, 70%-plus gross margins, and a sub-40% opex rate. That math means Roku could have billion-dollar profit potential in the long run. For a company with an $8 billion market cap, that’s a huge deal, and it means that Roku stock is on a long-term winning trajectory.
Bottom Line on ROKU Stock
Roku Inc. stock is overbought but not overvalued. As such, the shares will likely consolidate after their torrid run higher so far this year. The moving averages will catch up. Investor sentiment will cool down.
Once all that happens, investors should consider adding exposure. In the long run, this stock is only going higher. It just needs to go through some turbulence right now before the next move up.
As of this writing, Luke Lango was long ROKU.
