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Shares of Roku (NASDAQ: ROKU ) catapulted higher to start the year, with Roku stock rising from under $30 in late 2018, to above $70 by March 2019. The catalyst? A robust beat-and-raise holiday quarter earnings report which put to rest competition concerns, and underscored that Roku remains the unchallenged, runaway leader in the SVOD (streaming video on demand) aggregation market.
But, this rally has run into some resistance lately, as competition concerns have once again reared their ugly head. Specifically, Apple (NASDAQ: AAPL ) just launched its TV and TV+ apps, while Amazon (NASDAQ: AMZN ) is reportedly investing millions into expanding its arsenal of ad-supported streaming channels.
Both of those developments theoretically pose competitive risks to Roku, and investors are freaking out. Consequently, the stock has fallen sharply over the past few weeks.
The steep fall in Roku is actually a welcome sign for bulls. Next up for Roku? First quarter earnings, due in early May. Those numbers will likely be pretty good, given multiple operational catalysts on both the consumer and ad tech fronts. With the stock now well off its early 2019 highs, those good numbers should be enough to spark a rally in Roku.
That's why I'm bullish on ROKU this earnings season. A few weeks ago, this stock was fully valued, and even the best numbers likely wouldn't have sparked a rally. Now, though, the stock is much more reasonably valued, and technically beaten up. Against that backdrop, good numbers should spark a healthy rally.
The Numbers Should Be Good
From where I sit, almost everything I'm looking at says that Roku's first quarter numbers will be good.
There's two big things here. First, you have a flurry of consumer-facing catalysts which imply that active account growth was healthy in the first few months of the year. Specifically, Roku added HBO alongside several other sub services to its premium subscription offerings on the Roku Channel.
The HBO add is big because it came just before the Season 8 debut of widely watched Game of Thrones . Also, Google Trends search interest data remains favorable for Roku, Roku devices added Alex voice control capability in the quarter, and the company partnered with Adobe to improve ad targeting. All of these positive developments will likely show up favorably in Q1 numbers.
Second, the streaming market appears to be on fire. Netflix (NASDAQ: NFLX ) reported its biggest-ever quarterly increase in subscribers in the first quarter of 2019. Hulu appears to have a ton of momentum with its news "Hulu has live sports" campaign. Economic conditions have broadly improved in early 2019, thereby allowing for consumers to adopt more streaming services. Overall, the streaming market is simply on fire right now, and that, too, will likely show up favorably in Roku's Q1 numbers.
The important thing here is that good Q1 numbers will spark a rally in Roku stock due to positioning. A few weeks back, Roku was positioned for a huge Q1. But, now that the stock has fallen 15% of those early 2019 highs, the stock is no longer positioned for a huge Q1. Thus, if Roku does deliver a huge Q1, that will be a pleasant upside surprise which should lead to a rally in Roku stock.
Long Term Fundamentals Remain Healthy
Zooming out, strong first quarter numbers should yet again reaffirm what is a strengthening long term bull thesis for Roku stock. Broadly, that bull thesis is that Roku is increasingly turning into the "cable box" of the streaming world, and in so doing, is becoming an irreplaceable part of the SVOD ecosystem.
Context here is important. Consumers are pivoting rapidly and in bulk to SVOD services. Thus, demand is going up. Content producers are following suit and launching their own streaming services. Thus, supply is going up, too. Both of these trends will persist for the foreseeable future. Net result? Demand (the number of consumers in the SVOD market) and supply (the number of services in the SVOD market) will both go way higher in the long run.
Someone needs to connect all that demand with all that supply, and organize/curate all the offerings. Right now, that someone is Roku. With nearly 30 million active accounts, Roku is unrivaled in terms of size of SVOD aggregation services. The bigger Roku gets, the more it becomes the norm, and the more likely the company will one day be the cable box of a really big SVOD market.
The potential in this market is huge. Roku isn't a very big company. Thus, so long as Roku remains on track to turn into the cable box of SVOD, then Roku stock will remain on a winning trajectory.
Bottom Line on ROKU Stock
Roku stock has tremendous long term potential in the SVOD market. Right now, investors are discounting that potential due to mounting competition concerns. But, this is nothing new. Competition concerns rear their ugly head from time to time, and they are almost always silenced by strong quarterly numbers.
The same thing should happen this time around. That's why I'm bullish on ROKU stock ahead of its next earnings report.
As of this writing, Luke Lango was long ROKU, AMZN, and NFLX.
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