Roku (NASDAQ:ROKU) stock moves fast. It is one of the kings of the momentum stocks. So investors who trade it need to have strong conviction or a healthy appetite for risk. You could see this last week, when it reported earnings. Initially the reaction to the headline was jubilation — the stock rallied almost 10%. Unfortunately, it only lasted hours — the next day, it fell straight down. The green turned into a big red day of -6%.
What makes this worse is that it happened while markets set new all-time highs.
It’s hard to find an obvious reason for the u-turn in ROKU stock last week. Management delivered results that beat the expectations and they guided well. They grew revenues almost 50% over last year’s results. They also overdelivered on the active accounts, up 36% to last year. So the disappointment on Wall Street over the earnings report was puzzling and concerning. The prior reactions to the earnings have been positive for a while, so the bulls need to nip this dip in the bud and bring a rally this week.
Roku has a lot of fans, so maybe they could pull a revenge rally off. But the markets are down this morning, so they will need to bring their conviction. Because fundamentally, this is not a cheap stock. It sells at over 13 times its sales and it still loses money.
I am not knocking it for this, because Roku is a growth stock — I don’t expect it to be profitable during this phase. I expected it to spend a lot in order to grow fast.
But in this case it still hasn’t turned a profit after 17 years of being in business. Granted that the earlier years didn’t have the number of streamers as now but eventually investors will run out of patience. Until then I am not a hater, and I reserve judgement. I also remain a bit of a skeptic about how it’s going to blossom and grow into its high valuation.
Roku Stock Is Still a Rising Star
The drop on Friday was disappointing and Roku is having a hard time so far in 2020. But make no mistake — Roku stock is up five times more than the S&P 500 in the last 12 months, and 15 times more in the last two years. While Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) are up 30%, ROKU is up 213%, even after the earnings dip. Clearly it has nothing to apologize for after last week. Stocks need periods of consolidation to establish better bases for new upside potential.
Roku is positioned well to benefit from the wave that Netflix created and that companies like Disney and Apple (NASDAQ:AAPL) are propagating. It is an aggregator of content streams, so the more of them the better for Roku. With its growing base of active users, management can figure out ways to monetize them and adapt to new trends going forward. There are a lot of threats from alternatives that are creeping up a new ones that could emerge quickly and unexpectedly. However, management seems confident in what it’s doing so I have to give it the benefit of the doubt for now. The earnings report attests to that, since they overdelivered on expectations.
Owning it for the future is still a viable thesis. This is a stock that fits in investor and trader portfolios alike.
The Roku Range Is the Opportunity Now
In December, I wrote about the Roku trade upside opportunities that existed then. I also noted that there would be resistance as it approached $148 per share. Both of these came true as the stock rallied 10% and faded about 15% from just below $150. This was another bit of proof that it’s a momentum stock where profits come and go very fast.
The good news for the bulls is that through this tumultuous chop, the stock held its support zone. As long as it stays above $118, the buyers will buy the dip. So for the next few weeks, the range remains tight and a breach of either side will carry momentum in that direction. So above $150 per share the bulls can make a run for new highs. But if they lose this support zone, they could trigger a test of $100 or lower. Meanwhile, fast traders can buy it near $123 and sell it as it approaches $148.
There’s an age-old debate as to who is right — the quick, active traders or the ones who are in ROKU stock for the long haul. The right answer depends on the time frame of each individual. There is not one style of trading that fights all investment plans. The long-term investors depend heavily on their proper thesis for conviction, whereas the traders need the added skill of finding resistance and support levels for better timing.
Roku offers opportunities for both groups.