Year-to-date, Roku (NASDAQ:ROKU) is down close to 20%. Yet that metric only tells half the story. Roku stock actullay started the year around $125.

Then on Feb. 14, they hit a 2020-high of $151.20. But on March 17, they saw a 52-week low of $58.22. Now it hovers around $107.5. Roku stock has increased about 85% since the lows of mid-March.

Many investors are wondering if they are indeed late to the party. I believe ROKU stock to become one of the long-term winners of the new stay-at-home reality.

However, in the coming weeks, there is likely to be some profit-taking in the stock. Long-term investors with 2-3 year time horizon may consider buying the dips, especially if the share price goes toward $100 or even $95 level. Let’s see why.

Q1 Results and ROKU Stock

Roku is the largest over-the-top (OTT) streaming media device maker. On May 7, the group released first quarter 2002 financial results. Revenue came in at $320.8 million, an increase of 55% year-over-year (YoY).

Revenue is divided into two segments:

• Player revenue (88.2 million; 22% growth YoY)
• Platform revenue (232.6 million; 73% growth YoY)

Player represents sales of its digital media boxes. Platform, on the other hand, includes advertising sales, licensing and other non-hardware revenue sources.

In its early days, Roku’s player segment accounted for about 75%, while its platform segment provided the other 25%. However, these ratios have been changing rapidly. The expanding platform business, in return, means that the advertising business is growing.

The company also reports three key operating metrics:

• Active Accounts, i.e. its user base (39.8 million accounts; 37% growth YoY)
• Streaming Hours (13.2 billion hours; 49% growth YoY)
• Average Revenue Per User (ARPU) ($24.35; 28% growth YoY)

“We take seriously the responsibility to provide news, information and respite to households we reach which comprise an estimated 100 million people, management said in a statement. “Since staying-at-home began, we have seen an acceleration of growth in both account activations and streaming hours.”

Indeed, these key operating metrics support the statement. However, management also noted that its advertising business is being adversely impacted by the pandemic.

Finally, Roku’s operating expenses have also gone up in recent months. The loss from operations now stands at -$55.2 million. That number was only -10.7 million in Q1 of 2019. In other words, the company burns cash to get as many viewers as possible. So the performance is still top-line driven.

Following the earnings result, shareholders have hit the “sell” button in the shares.

Long-Term Tailwinds

According to a joint research project by Princeton University and the University of Chicago, “The number of Internet connected TV users has increased steadily over the past few years and an estimated 65.3% of Internet users in the United States (US)—close to 182.6 million people—used an Internet connected TV device in 2018.”

Recent eMarketer data also shows that Connected TV (CTV) usage in the US will surpass “200 million in 2020. Roku devices lead the category with 44.2% of viewers.”

The internet entertainment revolution has made viewing more personalized. And the new stay-at-home reality is showing that cord-cutting may be here to stay, even when the pandemic is mostly behind us. Roku management believes consumers are likely to find streaming both more cost-effective and convenient. Put another way, streaming gives control back to consumers.

Advertisers are following those U.S. viewers. That’s reason number one why, longer-term, I would not bet against Roku whose revenue increasingly comes from advertising. Domestic CTV ad spending is expected to go over $10 billion by 2021. And Roku is one of the ad leaders.

Management believes advertisers “will accelerate their reallocation of linear TV budgets to Roku, because of our audience reach and advanced advertising capabilities.”

What May Derail Roku Stock Now?

However, they may be short-term headwinds that may derail Roku stock in the coming weeks. Although Roku is a growth stock, it’s also a momentum stock. Therefore, the recent stellar run in price makes ROKU shares a candidate for profit-taking. After all, taking some money off the table can be expected as shares more than doubled in less than two months.

For example, on May 22, Stephens analyst Kyle Evans downgraded Roku stock and cut his price target to $105. The shares were down more than 5% on the day. In other words, Roku’s current price may reflect the expected growth in the rest of the year.

Are you also an investor who follows technical charts. If yes, then you may be interested to know that as a result of the recent impressive price gains, short-term technical indicators have become over-extended. Investors who pay attention to short-term oscillators should note that ROKU’s technical message has also become “overbought.”

While long-term investors would like to see Roku go and stay over the $100 level in June, traders are likely to keep the range between $95 and $105.

Therefore, if you have any recent paper profits, you may want to ring the cash register. Alternatively, depending on your risk/return profile, you may want to sit tight and ride out any potential volatility.

Finally, you may also consider initiating an ATM covered call position, for example, with a July 17-expiry. Such a covered call would decrease the volatility in your portfolio, offer some downside protection and also enable you to participate in a potential up move.

The Bottom Line on Roku Stock

In recent quarters, Roku has been growing at an impressive rate. And the stock price has reflected that trajectory. Yet some investors were not fully impressed with the recent quarterly report which indeed showed strong revenue and user growth.

Meanwhile, businesses may also be decreasing ad budgets significantly given the economic contraction that is likely in the cards in the rest of the year.

In the coming weeks, there might be further short-term profit-taking in ROKU, potentially offering investors better entry points if they decide to hit the buy button later in the year.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.