In reviewing the opportunity in Roku (NASDAQ:ROKU) stock, I need to start with an apology. A few years ago, I harshly judged it for its delay in reaching profitability. I had good reason at the time, since after 16 years they were still losing money. Management has most definitely shut me up, though, and that’s no longer an issue. The company financial metrics are solid now.
Currently the stock presents a reasonable growth opportunity. Roku not only has a net income, but management has more than quadrupled revenues in four years. It turns out that all it needed was a more conducive media environment to prosper.
ROKU had placed itself in the right place, and it was waiting for the right time to come to it. Netflix (NASDAQ:NFLX) delivered that for the company on a platter, because it changed how the world consumes its media to streaming. Now it’s no longer the question of if, but rather how quickly can we all get to 100% online content. My family has made the transition — we have no wired connections left.
ROKU Stock Moves Fast
This is one of the original momentum stocks. It moves fast in both direction, so it’s not for the faint of heart. This comment only concerns traders, because investors who stuck with it are smiling ear to ear. In 5 years, the stock is up more than 1,000%. That’s 10 times the progress that the S&P 500 made.
This accomplishment is due to strong strategic execution. This year, the stock is struggling down 6%. It has whipsawed inside a rather wide range from as low as $280 to $480 per share. Since ROKU stock is now closer to the lower end, it presents a double opportunity.
Traders can get long the stock for a swing trade opportunity. In addition, investors can also start long-term commitments to it. I stress that this is in no way an all-in situation because of the macroeconomic concerns. Sentiment has recently soured on Wall Street therefore we are at risk of a correction. I favor the upside scenario eventually, but I cannot discount potential lower prices overall.
Market Wide Risks
The Nasdaq has technical risks to extend the losses another 5% into next week. Therefore, taking partial positions even in front of that risk makes sense. Traders are more sensitive to timing the entries then long-term buyers. If markets stumble, $280 per share represents a pivotal zone for ROKU stock.
In November of last year, this served as the base for a massive rally. They gave all of it up by early May but then remounted exactly the same efforts into July highs. Guess what? They have almost given that again almost entirely. This doesn’t necessarily make for a bearish chart because it will go with the flow. My thesis is that the stock market finds food in here. Then ROKU will likely rally $40 before it falls that much.
I prefer to invest in stocks that have strong financials. The statistics for this one show it has an 19 price-to-sales ratio. This is competitive with other growth companies like Tesla (NASDAQ:TSLA). If the stock stumbles from here it should be temporary. Then I’d bet it finds footing in an old zone below $290 per share.
I wrote about its similar situation back in May. What transpired then paid ROKU traders well. Regardless, valuation will not be the end of the rally in the stock. Those who insist on it being more profitable are not being realistic with the growth it delivers. I jumped off that ship a long time ago when I saw the facts change.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.