Roku (NASDAQ:ROKU) is a stock I am learning to love. Until recently, I’ve been a harsh critic of the ROKU stock rally. I had mistakenly dubbed the infatuation that Wall Street has with it wrong. But I’m changing my mind about it.
My main complaint was that ROKU has been in business for 16 years and yet still loses money. Now, I think that what was wrong with Roku for all these years may have been the environment. Netflix (NASDAQ:NFLX) changed that in the last few years.
Now, the world wants to consume media via streaming. This is a trend that is gaining momentum at an exponential rate and will not reverse any time soon.
So if that’s the case, then ROKU stock has years of prosperity yet to come. They are source-agnostic because they aggregate the content and help with the delivery and viewing process.
I do use ROKU, but only as a dongle and not with any recurring cost to me. You don’t pay any subscription fees to ROKU, though you can pay for streaming services through Roku, and I’m subject to being continuously monetized through ad sales. Roku does offer premium subscriptions to “The Roku Channel,” which in turn gives subscribers access to premium content from other services, but that’s far from ROKU’s main source of revenue.
So if cord cutting continues then ROKU has an opportunity to carve itself a healthy chunk of the streamers. They simply need to grow their user-base and then grow their ad business. Maybe then it can grow into its valuation. As it is now it sells at 16 times its sales. For comparison purposes, this is four times more expensive than Amazon (NASDAQ:AMZN).
ROKU Stock Belongs in the Cloud — Pun Intended
The internet pipelines are all faster now. Even the mobile tech that’s coming with 5G will support speeds that are more than ample to pass the content anywhere in the world. Roku is in the middle of all this.
ROKU is delivering 30% year-over-year growth in the revenue per active account. This is the best metric to illustrate its potential. Since Roku is content agnostic they have a daily average watch-time per user three times higher than NFLX.
If eyeballs make money then ROKU has the setup to mint for years to come. Management sounds confident that they can continue to execute on plans and Wall Street believes it.
Roku stock price is up 229% year-to-date which is more than 10 times the gain of the S&P 500, Disney (NYSE:DIS) and Viacom (NASDAQ:VIAB). The stock has strong fans since it recently set a new high even after downgrades in early July.
Since I am not yet in love with the stock, and it is already up so much, I cannot condone taking a big bullish position right now. Especially since the markets in general are also near all-time highs. But the Roku stock chart shows that it has support above $90 per share. So valuation aside, it looks like it won’t be a major mistake to own the stock here and see if it rallies back to, and above, the all-time highs seen recently.
Instead of buying and hoping for a rally, those who like to use options can opt to sell puts or put spreads to generate income while leaving room for error. For example, I can sell the ROKU November $75 put and collect $5 per contract. I win 100% if Roku price stays above my strike. Otherwise, I breakeven at $70 and lose money below that. This is 30% below Thursday closing Roku price.
I consider betting long on Roku stock up here a speculative bet for a long-term hold.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.
