Trading Roku (NASDAQ:ROKU) stock is not for the faint of heart, but it can make investors big money. The trick is to know that Roku stock carries momentum faster and longer in either direction than most other stocks. This means wins can be big home runs, but mistakes can be very costly too. Roku investors who believe in the long-term case behind the stock need not worry a lot about short-term gyrations. But those who trade it more frequently better have some charting skills, or else they are at a disadvantage.
First let’s set the stage by saying that Roku is a novel coronavirus stock. By that I mean that this global shutdown plays perfectly into its operation. The concept is that it’s an aggregator of content that’s agnostic to the source.
And what we learned from Netflix (NASDAQ:NFLX) earnings a couple of weeks ago and from Disney (NYSE:DIS) last night, is that streaming demand is more popular than ever before. If Roku cannot capitalize on that fact, then I question if it ever will. Disney had its problems, but the only bright spot was Disney+ and this plays into Roku’s hand.
The Roku Stock Earnings Reaction
It’s important to stress that the short-term reaction to any earnings report is completely binary. Even the CEO of Roku can’t guess what the traders will do on Friday morning. Eventually, the results matter, but for the morning after, it will be all about the expectations. Logic suggests that the results coming this Thursday should be better than forecast. There is a bit of a concern if Roku stock rallies much more than 10% ahead of the event, because it would then leave it vulnerable to a dip on the news.
For the past two weeks, the stock behaved perfectly to its technical triggers and lines. The shorts from the rally into $130 were not stopped out until they booked profits where Roku had support near $110. I am lucky enough to lead a group of investors and that was the trade for Roku stock mid to late April. From here, the same resistances still exist at $130, $135 and the major fail at $151. That last one is the big problem for the longer term. The stock failed there miserably mid February and last December as well.
There Are Problems But There Are Opportunities Too
But every problem is a potential opportunity. If somehow the bulls can overtake $151, they would then target the all-time high. The first trigger for that scenario starts with $136 per share. The breach of it brings buyers to start a $40 rally. A blow out quarter and the right words from the conference call could create the necessary momentum to do this. Otherwise, it is best to trade the levels at hand.
For the bulls to mount a fierce rally they will need confidence. Roku stock has support below near $100 and more lower. This gives the fans of the stock courage to wage battles here and above. Yes, there are open gaps below, but not all gaps close on every chart. Trading the levels as price develops brings the best odds of success.
Trade the Levels on the Roku Stock Chart
The last time I wrote about Roku, I said that the trade is to chase the breakout above $140, and it never closed above it for confirmation. I also noted that losing $132 and $127 would trigger a big downfall. Of course, we now know that Roku stock crashed into the Covid-19 disaster. The actual correction exceeded my initial expectations.
The only caveat for me is that I am not Roku’s biggest fan. It has had a long history of operation and it still can’t profit. This is their time to shine, or at least promise that they are about to turn the page into the green. Otherwise, I question the model as it is right now. I know this will upset Roku fans, but I am stating facts. Wall Street will overlook profit misses if management can deliver palpable growth.
I have no issues when companies that lose money. Amazon (NASDAQ:AMZN) and Shopify (NYSE:SHOP) are perfect examples of this at two different stages. The first had its day of losses and now has reached the target of profits and growth. Shopify, on the other hand, still carries insanely high valuations, but also grows more than 50% per year. Roku is somewhere in between with price being 12 times its full year sales. Amazon and Shopify are 4 and 48 for comparison.
In summary, I would be optimistic of Roku’s outlook, but cautious short term. And I would definitely prefer it near $100 on a dip if one comes. We have to remember that the world is still out of work, yet the Nasdaq was 7.7% away from the all-time closing high yesterday. There is plenty of risk up here, unless life goes back to normal soon enough.