Breaking News
0

Roku’s Big Advance May Finally Be Over

By Michael KramerStock MarketsSep 20, 2019 02:49AM ET
www.investing.com/analysis/rokus-big-advance-may-finally-be-over-200466456
Roku’s Big Advance May Finally Be Over
By Michael Kramer   |  Sep 20, 2019 02:49AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This post was written exclusively for Investing.com

Roku (NASDAQ:ROKU) stock has risen more than fourfold thus far in 2019, but signs are emerging that the big run may be coming to an end. The shares have plummeted around 23% from their highs on Sept. 6 on worries over rising competition. Some signs indicate the stock may still have further to fall.

Increasing competition isn’t the only thing that investors need to worry over. The stock’s valuation is lofty, trading at nearly double the price to sales multiple of Netflix (NASDAQ:NFLX) — with Roku at 17.16 vs Netflix's 7.12. Additionally, the company isn't even expected to earn a profit until the year 2021.

Roku price chart
Roku price chart

Shares Come Crashing Down

The stock fell sharply after Comcast (NASDAQ:CMCSA) unveiledi ts new Xfinity Flex, a streaming media device creating yet another competitor for Roku. As Comcast’s attempt to capture cord-cutters, the Xfinity Flex joins other streaming devices such as the Amazon (NASDAQ:AMZN) Fire, Apple (NASDAQ:AAPL) TV, and Google (NASDAQ:GOOGL) Chromecast. It resulted in the stock plunging by as much as 15% intraday on Sept. 18.

Technical Crack

Roku technical chart
Roku technical chart

As a result, the stock broke a critical level of technical support at $143.50 and is facing further declines. The stock’s next major level of technical resistance does not come until $122. Should that level of support not hold, then it is at risk of declining to $100. At that point the stock would fill a technical gap that was created following Roku’s better-than- expected quarterly results in August.

Additionally, the relative strength index also suggests that the stock may fall further too. The index has fallen to a level of around 41. It would need to fall to 30 or lower before indicating that the equity has become oversold.

Valuation is Stretched

The technicals tell only half the story. The fundamentals suggest the shares are extremely overvalued. Based on analysts’ consensus estimates, sales are expected to grow by about 37% in 2020 to $1.5 billion from $1.1 billion in 2019. That leaves the stock trading with a one-year forward price to sales multiple of about 10.

Roku sales, earnings
Roku sales, earnings

It is a lofty valuation for a company that creates revenue from selling a hardware device along with a platform that generates ad revenue. For example, Apple is a device maker that also has a service revenue model; it trades with a one-year forward price to sales multiple of 3.7. Meanwhile, Facebook (NASDAQ:FB) and Google, which generate nearly all their revenue from ads, trade at 6.3 and 4.5 respectively.

Netflix, a content creator, is considered at times a highly or even overvalued equity. The company generates its revenue from a subscription-based model and trades at about five times one year forward sales estimates.

Roku does offer a slightly faster sales growth opportunity compared to the other companies mentioned above. However, that growth does not come at a pace that is more than double, which is what Roku’s current valuation would imply.

Short-Interest is Low

Despite the stock’s big advance, the short-interest levels have remained rather tame, at just 11.7% of the float. It could indicate that short sellers have decided to steer clear of the stock altogether, or they are merely waiting for a time to enter.

Whatever the case, the performance of the stock thus far in 2019 has been breathtaking, and hard to ignore. However, stocks typically do not rise in a straight line, and at times their valuations can even become stretched. At present, this appears to be the case for Roku and, should the technicals start to falter, the stock may have a bit further to fall.

Disclaimer: 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.

Roku’s Big Advance May Finally Be Over
 
Roku’s Big Advance May Finally Be Over

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments
Deepak Mehta
DMEHTA Sep 21, 2019 8:14PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Michael like jim u are a pumper of anything and everything when evals make no sense
Bobster Bambino
Bobster Bambino Sep 21, 2019 11:00AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
This is why im cautious with momentum stocks. They are a trade vs buy and hold
Tom Sam
Tom Sam Sep 21, 2019 10:26AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Now that it has declined to 100 as you predicted, what next?
Mike Jee
Mike Jee Sep 21, 2019 9:36AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I called this FOUR day ago.
Security Camera
Security Camera Sep 20, 2019 9:46AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
what do you mean the people you follow and who are they? (if you don't mind me to ask)
Kevin Paszli
Kevin Paszli Sep 20, 2019 9:34AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
the people I follow talked about this three days ago
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email