Roku (NASDAQ:ROKU) appears unstoppable. It has pulled back modestly from its recent $176.55 per share record high. However, at about $165 per share, Roku stock has risen by almost 65% since its August earnings report.
However, with the massive run-up in ROKU, the price looks to have moved far ahead of both its current position and its near-term growth potential. Although the company will likely prosper long-term, at these prices Roku stock at best a trade.
Roku Stock Seems Unstoppable
Without question, this company has logged some impressive accomplishments. It took what could have easily become a commoditized industry and turned itself into what my colleague Tezcan Gecgil calls “the pioneer of video streaming gadgets.”
Given the lack of profit potential in selling hardware, the company’s ad platform and now, the Roku Channel, drive the overwhelming majority of company revenues.
The Roku Channel cost the company its neutral stance between services such as Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), and Disney’s (NYSE:DIS) Hulu.
Still, this has helped make this stock a growth machine, and the market has rewarded the company handsomely for it. The company may not earn a profit until at least 2021. Still, Wall Street forecasts revenue growth of 46.9% this year and 35.6% in fiscal 2020.
ROKU and the Fundamentals
The equity has also proven all of my bearish predictions wrong. As a result, the ROKU stock price stands near record highs. Before the earnings announcement in August, I told traders to only buy as a speculative position on earnings. However, whenever I tell investors the stock has finished moving higher, it continues to rise.
As it moves up, it separates itself further from the fundamentals. I do not expect ROKU to come in line with multiples and earnings growth for several years. However, the overall market does not typically perform well this time of year.
Moreover, the U.S.-China trade war remains an ongoing issue. The equity trades at a forward price-to-sales (PS) ratio of just over 19, and almost 43 times its book value. At these levels, it has become priced for perfection.
None of this means ROKU cannot keep moving higher. However, should the overall market turn or the company itself receives unexpected bad news, the equity would likely take a hard hit.
Watch Insider Sales
Investors should also note that CEO Anthony Wood sold 35,000 shares at $155.06 per share on September 3rd. Other insider sales followed. Admittedly, CEO share sales can happen for numerous reasons. Also, the $5.4 million in revenue from the transaction amounted to a small fraction of his June sale of 400,000 shares for $41.3 million. However, this could point to doubts about ROKU in the near term.
Again, I still like how the company has transformed the streaming space. If a fall swoon or a worsening trade war leads to a lower ROKU stock price, long-term investors should look at buying. However, at current prices, it has become a bet as to whether traders will take it higher or lower.
The Bottom Line on Roku Stock
ROKU has become unpredictable at current levels. I still expect the company to dominate the industry it created. I also believe that it will achieve new record highs long term. It remains very possible that those increases will even continue shorter term.
However, such valuations have started to push ROKU into bubble territory. Once it falls significantly, it can take years, or sometimes decades, to recover.
As a much younger trader who thought he could do no wrong, I once invested in Cisco Systems (NASDAQ:CSCO) during the years of the dot-com bubble. I held a nine-fold gain at the March 2000 peak only to see most of my gains disappear. Almost 20 years later, CSCO still has not recovered its 2000 price.
Truly profiting from ROKU in the short term means knowing when to get out, as opposed to what time to buy. Perhaps following the example of the CEO would make for a wise decision.
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.
