Roku Stock Is Still a Hot Trade … For Now
Roku (NASDAQ:ROKU) had a tough year-end in 2018. After a strong start to it, Roku stock fell over 60% in the last two months. But this year, the stock is flying high again. Yes, the whole market has also had a sharp rally off the December lows, but ROKU has far out-performed the S&P 500 by tenfold.
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Judging by how strong it has been, going long ROKU stock now seems like a no-brainer, but therein lies the trap and it is easier said than done. Before you label me a hater, last year I wrote about going long the stock during its tough days. So if my opinion here comes across as negative it’s because of the actual price action and not a judgment against the company efforts.
ROKU stock is a momentum stock. On the way up it always seems ready for a correction. So it scares a lot of investors out, especially those bound only by fundamentals.
From that perspective, it is not cheap. True, it has only been public for under two years, so I shouldn’t judge its profitability. But this company is 16 years old and they still are not profitable. So it seems like a lost cause at this point.
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Nevertheless, stock in ROKU is a good trading vehicle while management navigates itself to a better profitability position. And the technicals do offer clues of proper entry points. This is a stock that is too hot too short and too high to chase blindly.
The stock is up again this morning as the whole stock market now feels that a deal between the U.S. and China is imminent. This comes on top of the large spike reaction to a strong earnings report, so clearly, the bulls are in charge of that stock.
As ROKU approaches the $74 area, the threat of a pullback increases. This is the spot of the prior failure level. This is not to say that it will again be a long-term top, but it is a spot of potential weakness. I usually want my entry points to be as strong as possible. A retest of the past neckline around $64 per share would make for better footing for bulls.
Bottom Line on ROKU Stock
Those who feel nimble enough to handle the threat can try to snipe and entry here while markets are this strong in general. Otherwise, I’d wait for the bulls to cross above $77.50 to chase it in open air of all-time highs. Clearly and regardless of my lack of faith in its long-term prospects competing against giants in the field, ROKU stock is a good trading vehicle.
Netflix (NASDAQ:NFLX) was the disruptor. It proved that the world wants to change the way it consumes media. The switch to streaming is not a fad and it is sustainable. ROKU is one of the few current companies that will play a part in that movement.
Unlike NFLX and Disney (NYSE:DIS), ROKU does not own the content so they are agnostic about who wins that race. Consumers can be clients of both NFLX and DIS and still be clients of ROKU at the same time. I consider them as an aggregator of content for now and also the owners of the roads that deliver the media to us. I personally use ROKU, but I am not a paying customer yet.
So in summary, although I would trade Roku stock for short-term profits, it has run too far for me to risk my money on it for the long haul. Most experts on Wall Street disagree with me since most of them rate it as a BUY or a STRONG BUY. And the stock is trading above their average price targets, so at some point they will need to change that or their rating on it.
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. You can follow him as @racernic on Twitter and Stocktwits.
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