Roku Investments At These Levels Make Sense

A few years ago I was a skeptic about the exuberance over Roku (NASDAQ:ROKU) stock. However, in the past two years I changed my mind because of the improvements in the financial fundamentals. Therefore, today I am speaking as a proponent of buying the dip in ROKU stock.

The Roku logo on the side of an office building comprised of sand colored concrete
Source: JHVEPhoto/Shutterstock.com

This week, equities are under pressure as investor sentiment has soured. This makes for touching trading conditions. For example, yesterday stocks fell out of bed mid morning and for no reason. The bulls had a clear win on their hand, and they chose to lose the game on purpose.

The lasting bad effect from that is that in the process they triggered bearish patterns. Almost all mega cap stocks are now below neckline that can carry prices much lower. Apple (NASDAQ:AAPL) for example triggered a bearish head and shoulders pattern that could target $156 per share.

The bulls can still save it, however now they are on their back feet peddling upstream. Similar scenarios are in the Nasdaq and the S&P 500 charts too. Amazon (NASDAQ:AMZN) has already started its breakdown from higher levels. And Netflix (NASDAQ:NFLX) just finished its target and then some.

ROKU Stock Is in Good Hands

ROKU Stock Chart Showing Base Below
Click to Enlarge
Source: Charts by TradingView

This brings us to ROKU stock, which has already been in pain for months. There was good news yesterday because among the rubble, it managed to close positive on the day. Sadly, it fell overnight in sympathy to the reaction to Netflix’s recent earnings report. Investors completely rejected the message from Netflix and sold the stock down 20%. This dragged Roku down after hours erasing whatever good news transpired during the day.

My selling point today is more about technicals than fundamentals. However, it is good to know that the company is executing on plans very well. Otherwise they wouldn’t have delivered a tenfold increase in gross profit since 2016 and a six-fold increase in revenues. Clearly they know what they’re doing, so investors should give them the benefit of the doubt.

The growth rate is not showing signs of deceleration. Therefore I can assume that this swoon in ROKU stock price will pass. Statistically this is not an expensive stock with a price-to-sales under 10. This puts it in the range of Apple, Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB).

If there are no fundamental problems, then the chart would be the second opinion I need. In this case Roku has already shed 70% of its value since its all time high. Moreover, it reached the level that was a massive failure in 2019, and the breakout after the pandemic. When stocks fall into such pivotal zones, they tend to find support. I bet that there are buyers lurking below these current prices.

Guard Against Outside Factors

Since I noted the technical bearish triggers in the indices I must leave room for error. Investors looking to initiate positions in Roku should only do partial size at first. The idea is to average in, not average down. Wall Street is having a crisis of sentiment in anticipation of the Federal Reserve monetary policy change. My gut says that our imagination is being more bearish than it needs to be.

Hopefully soon Federal Reserve Chair Jerome Powell sheds some light over their plans. Until then investors will be preparing for the worst. Those already long the stock may have missed the opportunity to panic out of it. The easy fall has already happened, and the bears from here will need hard work to do more damage.

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


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