Roku's Stock May Rise Sharply Short-Term

Dec. 26, 2019 12:04 PM ETRoku, Inc. (ROKU)94 Comments

Summary

  • Roku's stock is breaking out and could be heading back to its highs.
  • The valuation for Roku is still stretched.
  • But momentum will carry the stock for now.
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Roku's (NASDAQ:ROKU) stock has been on a wild ride in 2019, and the roller coaster isn't about to stop. Shares may be getting ready to surge back to their 2019 highs, based on the technical chart. However, any gain should be considered suspect over the longer term as the stock's valuation still appears to be stretched.

The last time I wrote on Roku was before the company's quarterly results on October 31. At the time, I noted the stock was likely to fall from its then price of $147 to $135. Shares ended up falling to as low as $116. You can track all of my free articles on Seeking Alpha on this Google Spreadsheet.

Approaching Resistance

Currently, Roku is nearing an essential level of resistance at $150. Should the stock rise above that level of resistance, it is likely to climb higher towards $161, a gain of 8.6%. There is a technical pattern that has formed in the chart known as a gap. A gap is a space in the chart that is created following a sharp decline or increase in stock price from the previous day close. In this case, should the stock rise above resistance at $150, the stock would likely work its way higher to fill that gap. However, shares could climb to as high as $175 should the stock clear resistance at $161, a gain of 18% from its current price of $148.25 on December 26.

The relative strength index is currently trending lower but is attempting to break out and rise above that downtrend. Should that happen, then it would suggest that momentum in the stock has turned from bearish to bullish.

However, should the stock fail to rise above resistance at $150, then it is likely to pull back to a region of support around a price of $135.

Valuation Creates Risks

Despite the optimism, the chart portrays the stock doesn't come cheap. The shares are trading at 7.7 times 2021 revenue estimates of $2.09 billion.

ChartData by YCharts

Revenue estimates for 2021 have risen sharply in recent months. It was in November they stood at $1.99 billion and $1.72 billion in March. It would suggest that analysts' views for the company have grown more positive over the course of the past year.

Earnings are expected to materialize in 2021 at $0.21 per share, which means the stock trades for 707 times 2021 earnings estimates, a fantasy-like valuation. Even when valuing the company on its projected EBITDA, the stock trades at 521 EV/EBITDA ratio.

The stock's sales multiple seems more reasonable; then, it was at points in the past. But still, it isn't cheap either, and when compared to other players in the streaming landscape, such as Netflix (NFLX), it is high. For example, Netflix trades around five times 2021 revenue estimates of $29.2 billion. Advertising peers such as Facebook (FB) trade for 5.6 times 2021 sales estimates of $102.55 billion.

It would suggest that the company has a lot to grow to fill into the valuation investors have given it. It could mean two things: either the shares are overvalued in the short-term and the stock is likely to trade sideways for some time as the fundamentals grow or it could mean that shares are overvalued and poised to fall longer-term.

The significant valuation also means that the company has very little room to maneuver or disappoint. The stock currently prices in perfection and assumes, based on the valuation, the company will be able to grow revenue and eventually earnings very quickly in future years. But one slip up could result in the shares falling sharply and result in analyst cutting estimates.

But, for now, momentum suggests the stock keeps moving up.

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This article was written by

Mott Capital Management profile picture
28.85K Followers
Designed for investors looking for stock ideas and broader market trends.

I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.

I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels. 

Disclosure: I am/we are long NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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