Shares of Roku (NASDAQ:ROKU) have been on fire, even though they’ve cooled off a bit since hitting $108.32 in June. The stock was unfairly punished in the fourth quarter, even as the company reported strong earnings. Patient investors (and those with a strong stomach) have been rewarded though, with ROKU stock running from $26.30 in December to more than $100 today.
Can they expect even more upside going forward?
It feels like investors viewed Roku’s strong fiscal fourth-quarter results as a one-off success in February. In May though, they really bought into the strong results as the stock went from $65 to $95 in just a few weeks. That action came amid a bruising run in the stock market, by the way.
With two very strong earnings reactions in the books, I think Roku stock price can garner some bullish momentum to new highs before the next report. That will come sometime in mid-August.
Let’s take a deeper dive.
Yet another streaming platform has been added to the growing list: AT&T’s (NYSE:T) Warner unit recently unveiled HBO Max. Currently available or coming soon is HBO Go, HBO Now, HBO Max, Disney’s (NYSE:DIS) Hulu and Hulu TV, Disney+, ESPN+, Amazon (NASDAQ:AMZN) Prime Video, Netflix (NASDAQ:NFLX), NBCUniversal’s platform, YouTube TV and others.
The field is getting crowded, and while that leaves questions about who will win, ROKU is in prime position.
When Disney unveils its Disney+ platform, millions will want in. Roku is an easy solution for those customers. So while they duke it out for the best content and total subscribers, the only thing that matters to Roku is having the best platform to host all of these services. Luckily, they do. And it’s why it’s dominating streaming now and will in the future.
Valuing Roku Stock
The biggest critique for Roku stock is its valuation. Simply put, it isn’t cheap. But when a company is positioned atop a secular growth industry, it rarely if ever comes cheap. If you wanted a stab at Roku at “cheap” levels — although, anything below $50 feels cheap in hindsight — investors could have nabbed this name below $30 in December.
Back in March I made the case that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) should acquire Roku. The rationale was simple: Google’s Chromecast is one of the least popular streaming devices on the market, while Google operates one of the most popular websites in the world with YouTube.
What people fail to realize is that Roku is not just a “stick you put in the TV.” It’s the operating system for streaming video. Platform revenue and profit is surging (up 79% and 76%, respectively), while hardware revenue is down big. Streaming hours surged 74% to 8.9 billion.
The sooner investors understand this, the better: Roku stock is not about the hardware. It’s all about the platform. While richly valued at almost 12 times this year’s sales and still not generating a net profit, Roku is a buy-on-dips stock for investors who want to ride this secular trend higher.
Trading Roku Stock Price
Click to EnlargeUltimately, that’s the problem with Roku stock. It has gone up so far, so fast that investors who missed this might be out of luck. But keep in mind, market-wide selloffs have dethroned Roku stock price in the past. Shares went from $77.50 in October to sub-$27 less than three months later — with a fantastic earnings result in between.
That’s a 66% haircut despite no change in the fundamentals. When markets decide to sell, they do so aggressively and indiscriminately.
From a trading standpoint, we now have points of reference on the upside and the downside. On the upside, we have resistance near $105 with a high at $108.32. Over $105 and that high is on the table, with an even larger run on watch should Roku stock push through.
On the downside, $90 is rough support, with $87.34 as the low. Below the latter and ROKU stock could be heading down a slippery slope. Watch for the 50-day moving average to act as support as well.
Given that the momentum-measuring MACD reading (blue circle) is starting to turn in ROKU’s favor, a larger rally could be brewing. Particularly if ROKU can clear its recent highs.