Roku (NASDAQ:ROKU) stock has been a star in 2019. Even after this most recent correction, ROKU stock is still up nearly 300% year to date. From that perspective, there is still plenty of froth to shed if the selling resumes. But for now, the buyers of the stock are still in charge on the higher time frame charts. Today we discuss three reasons why ROKU stock will continue to out-perform the indices.
After so much promise and an astonishing rally, September turned out to be a disaster month for ROKU stock. It fell 44% from its September top to bottom. But it has found footing and now the fight is on for the next leg direction.
3 Reasons Roku Stock Is a Star
The first reason you shouldn’t count ROKU out yet involves math. After the correction, ROKU bounced back and is pausing around the 50% Fibonacci retracement level. This is the natural pause where the buyers and sellers have another standstill to decide who is going to take the next step. So the fans of the stock can gather their wits about them and retrench for another run.
Second, ROKU’s correction was so fierce that it completely filled the massive gap to $105 per share. This appeases the technicians who don’t like leaving unfinished business on charts. So that talking point and its corresponding downside pressure are neutralized.
Third is eagerness. On the day that Netflix (NASDAQ:NFLX) reported earnings, ROKU stock spiked along with NFLX. Even though, this only lasted but one day, it is evidence that the ROKU fans are still eager for repeat performances and that they are not done yet. In the next few weeks ROKU will have its chance when it reports to Wall Street how went the quarter.
ROKU Has a High Bar
The expectations are high, so the onus is on management to live up to them, especially with their guidance. This is not a cheap stock. Investors gave it a pass on that because of its growth potential. If the report shows any weaknesses in sales or signup metrics, ROKU stock would be susceptible to hard selling.
It is important to note that the rise in the stock came with decent relative volume. So, now, the year-to-date point of control is near $106 per share. This is proven support in case it suffers such a nasty correction on earnings. Otherwise, losing recent support would bring a tremendous wave of selling to $70 per share, which is where it was two earnings reports ago. While this is not my forecast, it is a viable scenario.
Fundamentally, after 16 years, ROKU still loses money and sells at 16 times its sales. This is a huge premium as it is more than four times that of Amazon (NASDAQ:AMZN) and two times NFLX to name two other growth companies.
ROKU Scene Is Set for a Showdown
The range of the ROKU stock price has tightened into a point. So there is little room to go before they have to commit to a breakout. The direction of the move is still unknown, but if the bulls can beat $136.75, then at $139.75 they can start a $30 rally from there. But it won’t be easy with heavy resistance near $140 per share.
Conversely, if the sellers succeed in breaching below $124.65, they could have the opportunity to drop it another 15% lower and fill a few open gaps from the recent bounce. On a longer time frame, ROKU needs to defend the recent lows at all costs because losing them would carry the stock much lower from there.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
