Momentum sure is fun on the way up. Problem is momentum can be realized on the downside, too, and these days, Roku (NASDAQ:ROKU) stock is sporting an unfortunate amount of downward momentum.
The once-beloved maker of streaming devices has tumbled almost 33% for the month ending Oct. 8 and resided nearly 39% below its 52-week high on that date. That’s basically a bear market two times over.
One reason why Roku stock is getting battered, and why that decline may be a case of too much too fast, is competition. As in investors are growing concerned about the looming streaming wars. This is an arena Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) have danced in for some time, but able, well-heeled rivals Walt Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) are getting into the mix, too.
What do all those companies have in common when it comes to streaming? They are purveyors of streaming content. Roku is not that. Rather, Roku’s core competency is making the devices that make streaming viewership possible.
Yes, there’s competition on that front. Amazon has the Fire TV Stick and Apple has Apple TV, while Comcast (NASDAQ:CMCSA) has the Xfinity and Facebook (NASDAQ:FB) is eyeing a relaunch of Portal TV.
Let’s briefly examine those offerings against Roku. The Fire TV Stick has been around and is a credible competitor, but to date Apple TV has scuffled. Comcast has a mountain to climb to pilfer market share from Roku while Facebook’s myriad privacy and trust issues are likely to make some streaming customers unwilling to further invite the company into their homes.
Bottom line: one in five streaming devices in the U.S. is made by Roku, and it’s more likely the company increases that market share than it is to cede share to rivals.
ROKU Risk and Reward
Right here, right now, Roku stock is undoubtedly high risk. Last month, ROKU stock experienced its worst decline since its initial public offering. Adding to the risk is the basic definition of momentum investing, which states that a security can continue doing what it has recently been doing, rising or falling, for an extended period of time.
Making Roku stock all the more risky over the near-term is the empirical evidence that backs the momentum, as highlighted by the UCLA Anderson School.
“Yet various styles of momentum investing continue to reward their investor practitioners with above-average returns. It doesn’t work in every market environment,” according to a UCLA Anderson study. And momentum stocks are subject to sharp reversals that can leave trend-followers badly bloodied. Nonetheless, a 2014 study by a team led by hedge fund billionaire Clifford Asness urged momentum-doubters to surrender, already. ‘The existence of momentum,” they wrote, has become “a well-established empirical fact.”
For those that don’t like academic speak, look at momentum like this: in finance, momentum can be a freight. Investors are either on board or at risk of getting run over.
While there are risks with ROKU stock, there are also potential rewards and of the significant variety at that. Some analysts are defending the stock to that tune.
In late September, Oppenheimer analyst Jason Helfstein called the recent slide in Roku stock a buying opportunity while reiterating an “outperform” rating and $155 price target on the shares.
“We believe the unwind of momentum has been the main reason for the stock correction, and presents a buying opportunity,” said the Oppenheimer analyst in a note.
Bottom Line on Roku Stock: Dig Deeper
In the most recently reported quarter, Roku’s platform unit accounted for two-thirds of revenue. That’s the unit in which the company’s streaming devices are classified, but ROKU has revenue streams beyond selling devices.
The company generates revenue from advertising sales on the platform unit, which diversifies its revenue mix and gives Roku stock another avenue for growth. However, devices are important to ROKU and the company recently unveiled a slew of new models, including some that are cost-effective compared to predecessors, indicating that company is looking to attract customers at a variety of price points.
If successful, that could boost ad sales and provide a lift to Roku stock in the process, possibly restoring lost upside momentum along the way.
Todd Shriber does not own any of the aforementioned securities.
