Is It Time to Take Profits in Roku Stock After a Rewarding Quarter?

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Roku (NASDAQ: ROKU ) started April and the new quarter on the same positive footing it had throughout the first quarter. On Apr.3, it reached an intraday high of $71.77. However, since then, Roku stock has been giving up some of its recent gains.

Is It Time to Take Profits in Roku Stock After a Rewarding Quarter? Source: Shutterstock

While I would not bet against Roku shares longer-term (year-to-date, Roku Inc stock is up over 99%), in the next few weeks, the stock is unlikely to go above $77.77 - its 52-week high, which it saw on Oct. 1.

There might be further short-term profit-taking in ROKU, potentially offering investors better entry points if they decide to hit the buy button later in the quarter. With all of that in mind, let's look at what may be next for Roku stock.

Roku's Fundamental Story So Far

The streaming device platform Roku, which also is the leading connected TV manufacturer in the U.S., became a darling of Wall Street soon after its IPO in 2017. The price of Roku stock initially went up from an opening price of $15.78 to a high of $77 in just over a year, benefiting from the disruptive internet entertainment revolution that has made viewing more personalized.

Then came the selloff in the last quarter of 2018 - especially in the tech sector - which was seen as an important signal that investors were no longer willing to be exuberant with technology stocks and their rich valuation numbers.

Roku's earnings report on Feb. 22 pleased Wall Street. Its platform segment, which accounts for the bulk of the company's sales, consists of advertising, licensing and other non-hardware revenue sources. Its Q4 2018 earnings beat analyst estimates and the company provided guidance that came above expectations for 2019.

The earnings were at 5 cents per share compared to 3 cents expected by analysts. Its revenue grew to $275.7 million, up 46% year-over-year. Roku's accelerating growth led to a net income of $6.8 million.

In its efforts to hit the $1 billion mark, Roku management is looking at international expansion as the next strategic area of growth. The company aims to grow the number of countries it operates in and to add local content to attract international viewers.

What Could Derail Roku Stock?

Roku is a growth stock, but it's also a speculative stock. Long-term ROKU bulls happily highlight many of Roku's competitive advantages, starting with ROKU's share of smart TVs sold in the U.S. and projected annual growth of over 30% in the rapidly expanding over-the-top streaming market.

On the opposing side of the coin are the nervous investors and short-sellers who are looking for any excuse to short Roku stock. Unlike Netflix (NASDAQ: NFLX ), Roku does not generate content. This is another reason why some investors worry that Roku's revenue growth through subscriptions may simply be not enough to justify the rich valuation.

ROKU is facing increasing competition from tech rivals such as Alphabet's (NASDAQ: GOOG , NASDAQ: GOOGL ) Chromecast, Apple's (NASDAQ: AAPL ) Apple TV, and Amazon's (NASDAQ: AMZN ) Fire TV. Disney  (NYSE: DIS ) is also launching its own streaming service soon. As these competitors continue to make their mark in the marketplace in 2019, investors may decide to have a wait-and-see attitude, pressuring the recent price gains.

Doubtful analysts further point out that the hefty valuations for Roku Inc stock would be hit in case of an economic slowdown. If the broader market does not go up as rapidly as it has done over the past years, then the momentum in high-flying stocks like ROKU would slow down, too.

If Roku cannot keep up with the aggressive growth assumptions, then shareholders may become more concerned with low profits as well as its margins and the stock price could easily suffer.

Short-Term Technical Analysis

ROKU stock's 52-week price range has been $26.30 (Dec. 24, 2018)-$ 77.57 (Oct. 1, 2018). In the coming weeks, I expect its price to be a battleground between investors and traders. As a result of the impressive Q1 price gains, short-term technical indicators have become over-extended. Investors who pay attention to short-term oscillators should note that ROKU's technical message has also become "overbought."

Therefore, in mid-March, following an analyst downgrade, it was not surprising to see a rapid fall of 14% in one day on the headlines.

While long-term investors would like to see Roku go over the $80 level, traders are likely to keep the range between $75 and $60. Indeed, on Apr. 4, the stock closed at $64.49. Therefore, a further pullback toward the low-$60's or even high-$50's level might occur in ROKU stock in the next few weeks.

If you already own Roku stock, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 5-7% below the current price point.

If you are an experienced investor in the options market, you may also consider using a  covered call strategy with approximately a three-month time horizon. In that case, you may, for example, buy 100 shares of Roku at a limit price of $65.49 (the closing price on Apr. 4) and, at the same time, sell a ROKU July 19 $65 call option, which currently trades at $8.9.

The $64 option is almost at-the-money, offering about 14% downside protection in case of volatility and a decline in Roku Inc stock. This call option would stop trading on July 19, 2019, and expire on July 20.

The Bottom Line on Roku Stock

Although I believe ROKU's management will successfully take the necessary steps to grow the company profitably in the long run, I do not think Roku stock will repeat its recent exponential up move in the next few weeks. Thus, investors should not rush to hit the buy button on ROKU shares yet. You may want to wait for the release of the next quarterly statement in May 2019 to re-evaluate the balance sheet and the fundamentals.

Well-performing stocks tend to keep on winning, and the recent strength of Roku stock might be a good indication that within three or four years, investors who buy ROKU on the dips are likely to be rewarded handsomely. In the meantime, Roku may also find itself in the middle of a bidding war from the competitors to be acquired.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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The post Is It Time to Take Profits in Roku Stock After a Rewarding Quarter? appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing
Referenced Symbols: ROKU , NFLX , GOOG , GOOGL , AAPL

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