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Shares of streaming device maker Roku (NASDAQ: ROKU ) have been on fire in 2019. ROKU stock exited 2018 around $30. By mid-June 2019, the stock was trading hands for around $110, meaning that over the course of six months, ROKU stock had tripled - and then some.
Naturally, this parabolic rally in ROKU stock is due for a breather. It looks like that breather is finally materializing in late June. As of this writing, ROKU stock has fallen nearly 10% off its mid-June highs, and is now trading below its 20-day moving average for the first time since late April 2019.
The downside catalyst? Increased competition from Amazon (NASDAQ: AMZN ), which just launched its own series of low-cost HDR Fire TVs to take on Roku TV. This increased competition headwind will likely weigh on investor sentiment for the foreseeable future, and continue to put downward pressure on the stock until fundamental or technical support arrives.
Technical support doesn't arrive until $90. Fundamental support won't arrive until July or August. Thus, it appears that red-hot ROKU stock is due for a prolonged cooling period over the next several months.
To be sure, this weakness is a buying opportunity in the big picture. But timing and price are everything in markets. The timing isn't right yet to buy the dip in ROKU stock - nor is the price right. At some point, the timing and price will make sense. At this point in time, $90 looks like the right price, and mid-July looks like the right time. Until then, it's probably best to avoid buying into recent weakness.
Near-Term Pain Here to Stay
From most perspectives, it looks like the recent downtrend in ROKU stock is here to stay for the foreseeable future.
On the fundamentals side, increased competition from Amazon is a scary thing for investors. Amazon is arguably the most disruptive company ever. As such, whenever news breaks that the big and scary Amazon is upping is disruption efforts in a particular industry, investors in that industry get scared. They sell first and ask questions later.
This dynamic normally doesn't stop until there's proof that these upped disruption efforts aren't causing any damage. We won't get that proof until Roku reports quarterly earnings next. Roku's next earnings report isn't due until August. Thus, until then, Amazon-related competition concerns will hang on the stock.
On the technical side, ROKU stock has broken below its 20-day moving average for the first time since April 2019. Whenever the stock does break below its 20-day moving average, it usually doesn't rebound until it finds support at another moving average. Because ROKU stock has rallied so far, so fast, the next line of technical defense (the 50-day moving average) doesn't come into play until around $83. To be sure, $90 is a technical support point simply because it is a round number. But, even then, there isn't much technical support for this stock in the upper $90s.
Overall, then, it does appear that recent downward pressure on ROKU stock is here to stay for the foreseeable future.
Long-Term Gain Also Here to Stay
Zooming out, recent downward pressure on ROKU stock is just a blip on the radar, and while it is here to stay for the foreseeable future, so are this company's favorable long term growth prospects.
In the big picture, Amazon competition isn't a big deal. The over-the-top TV trend is so large, and the market will be so big, that it can accommodate multiple large and successful over-the-top streaming device and TV makers. Right now, Roku has a clear lead in the important U.S. market, with one out of every three smart TVs in the U.S. sold in the first quarter being a Roku TV. Amazon's new low-cost Fire TV line-up will eat into that share - but not much. And secular growth throughout the whole industry will be more than enough to offset any Amazon-related share erosion (total streaming subscribers in the U.S. are expected to rise 7% this year).
Broadly, then, the secular growth story supporting ROKU stock remains favorable. That growth story is centered around Roku becoming the "cable box of the over-the-top TV world", or the system which most consumers use to access and watch their favorite streaming services. At scale, this positioning will translate into 100 million-plus consumers using the Roku system everyday, which should produce billions of dollars in AVOD (advertising-video-on-demand), SVOD (streaming-video-on-demand), and TVOD (transaction-video-on-demand) revenue.
All of that revenue is of the high-margin variety, so it will flow into big profits at scale. Thus, in the long run, Roku is a company with tremendous profit growth potential. All that profit growth potential will ultimately keep ROKU stock on a long term winning trajectory.
My math indicates that ROKU stock has potential to hit $150 within the next several years, and that a fundamentally supported 2019 price target for this stock is roughly $100. Hence, while the stock may be stretched in the near term, it still has a long runway for further growth in the big picture.
Buy the Dip at $90
Given the lack of near-term technical and fundamental support, buying the dip in ROKU stock should be an exercise in patience.
Technical support should come in around $90. That's the next big level to watch here. Meanwhile, fundamental support could come in mid-July, when Netflix (NASDAQ: NFLX ) reports earnings. Netflix's numbers should be pretty good, and will broadly underscore that the secular streaming video growth narrative remains on track. Confirmation of that secular growth narrative should provide a lift to ROKU stock and help ease Amazon-related competition fears.
All in all, then, ROKU stock should find support at the $90 level in mid-July. As a result, while I'm bullish on ROKU stock long term, I'm also not buying more ROKU stock just yet.
Bottom Line on ROKU Stock
ROKU stock has been red-hot all year long, and now, the stock is finally cooling off. This cooling-off period will probably last for the next few weeks, and it could drag ROKU stock down to $90, or even lower.
But the long term bull thesis remains intact, so as this stock continues to drop towards $90, the "buy the dip" thesis becomes more and more compelling. As such, while investors shouldn't be in any hurry to buy more ROKU stock here and now, they should be ready to pull the trigger if this stock keeps falling towards $90.
As of this writing, Luke Lango was long ROKU, AMZN, and NFLX.
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