Roku (NASDAQ:ROKU) stock could produce one of the more notable earnings reports of the season. The company will announce on Wednesday, Nov. 6, after the market closes. Past earnings reports have produced an extreme reaction in the stock. Given the volatility ROKU has seen since the last release, investors can expect more post-earnings fireworks no matter how traders react.
For the company’s third quarter, Wall Street forecasts a loss of 28 cents per share. That represents a decline from year-ago levels when the company reported losses of only 9 cents per share. However, analysts also predict consensus revenues of $256.1 million. The streaming firm brought in $173.4 million in the third quarter of 2018.
ROKU has a history of massive swings following its quarterly announcements. It rose by almost 21% the day after releasing its second-quarter report. It has also seen similar moves, both up and down, in past quarters. In the case of Q3, the volatility continued during the quarter. In September, Roku stock fell from highs above $170 per share to below $100 per share as competing offerings from Comcast (NASDAQ:CMCSA) and Facebook (NASDAQ:FB) rattled investors. However, seeing the fears as overdone, traders bid the equity back above $150 per share in October.
ROKU Leaves No Viable Choices Pre-Earnings
Still, at current levels, predicting where ROKU goes will likely remain difficult. Valuations have proven useless at predicting this stock’s behavior. While the current price-to-sales ratio of 18 points to significant overvaluation, it has dramatically exceeded average multiples since its IPO. Though the earnings report could trigger a drop, betting on such a decline has burned many investors.
Still, Bank of America Merrill Lynch analyst Ziv Israel initiated the stock as a “buy.” He believes the company benefits from more market entrants. InvestorPlace’s Chris Lau sees a “strengthening platform” for this same reason.
However, InvestorPlace’s Vince Martin worries the equity could get “slammed” after earnings. In his argument, he compares it to a more overvalued stock, Shopify (NYSE:SHOP). He also noticed that Shopify and Roku seemed to fall in tandem. SHOP stock fell after its earnings report, but only by about 3.8%.
This makes betting on the unpredictability itself an even more risky bet. Many might look at investing via a straddle option. This involves buying both a call and a put option hoping the volatility yields a profit. At the current Roku stock price of about $140 per share, buying both a call and a put option that expires on Friday, Nov. 8 will come to a combined cost of about $21. This means the stock must move by 15% in either direction to earn a profit.
Admittedly, history indicates ROKU is the one stock where such a trade might work. However, the relatively muted reaction in SHOP stock following earnings should give investors pause. Given the high cost of these pre-earnings options, the risks outweigh the potential rewards.
The Bottom Line on Roku Stock
ROKU remains too risky to buy before its earnings report. With the overvaluation, speculation drives Roku stock. However, with regard to the bull case, betting that an overvalued stock will move much higher often burns investors. Moreover, the volatility in ROKU since the last earnings report may point to a downward move.
Still, investors often ignore bad news, particularly with stocks in emerging industries such as video streaming. The extreme reactions following past earnings announcements may convince some traders to try a straddle. Still, the high cost of a straddle comes with elevated risk levels.
Given the history or Roku stock, I would expect a more modest loss than predicted, and probably higher-than-expected revenues as well. Still, when considering the choices, either buying or shorting the equity appear too dangerous at this time.
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.
