Is it Profit-Taking Time on Roku (NASDAQ: ROKU)?

What a week for Roku NASDAQ: ROKU! The streaming company surged more than 20% last week due to a combination of company news and analyst upgrades.

Let’s start by looking at the company news.

Roku disclosed a few year-end metrics on Wednesday, taking away some of the suspense ahead of Q4 earnings (set to be released on February 12, 2021):

• Active accounts surged to 51.2 million in the fourth quarter, up 39% yoy. That beat analyst expectations of 50.2 million active accounts. Moreover, Roku added 5.2 million accounts during Q4, better than the 2.9 million accounts it added in Q3.
• Roku is estimating around 17 billion streaming hours for Q4 and 58.7 billion streaming hours for full-year 2020. Both the quarter and the full-year are up 55% yoy.
• Roku TV is the No. 1 smart TV OS sold in the US and Canada. It has 38% of the market share in the US and 31% in Canada.
• The Roku Channel reached nearly 62 million Americans in Q4, double its reach in the same period a year ago.

On Friday, the company announced that it has acquired Quibi, which will further bolster the Roku Channel. The acquisition will give Roku exclusive global distribution rights to the short-form streaming platform. Quibi has had its issues, but Roku reportedly paid less than $100 million for it – a bargain. Investors cheered the news because it’s a low-risk, high-reward deal for Roku.

The Street Gave Roku Love

On Tuesday, a day before Roku released its year-end metrics, Wells Fargo NYSE: WFC analyst Steven Cahall increased his price target from $275 to $414. Cahall thinks that Roku is going to benefit from higher average revenue per user (ARPU) as advertising spend could pick up in 2021.

Shares jumped 5.4% in response, closing at $335.18 on Tuesday, but that still gave shares nearly 24% of upside before they would hit the new price target.

On Thursday, Needham analyst Laura Martin upped her price target from $315 to $400 after digesting Roku’s year-end disclosure. Martin said, “What's clear to us from 2020 is that ROKU has won the streaming wars in the US.” She added, “Its [connected TV] focus, platform competitive advantages, moats, and execution excellence all suggest to us that ROKU will continue to take market share in 2021.”

The market reaction to Martin’s note was even more powerful; shares soared more than 10% to $379.29. Friday brought the Quibi news, which sent shares all the way to $399.13. With Roku rapidly closing the gap on the new price targets, the question becomes:

Is ROKU Still a Good Risk-Reward at Current Levels?

When we last examined Roku, the company was closing in on a deal with HBO Max and analyst expectations for Q4 appeared to be too conservative. The company has now finalized its deal with HBO Max and while the company didn’t release all of its Q4 numbers, investors can infer that revenue is going to be higher than they originally expected.

Roku still has an incredible long-term growth opportunity in front of it, but a lofty valuation has gotten even more lofty. The streaming company is now trading at 32.2x current sales, and earnings aren’t likely to materialize for the foreseeable future.

But the growth opportunity is incredible. In July, Macquarie suggested that Roku can see revenue grow at a CAGR of 35% (or more) over at least the next three years. That outlook actually seems too conservative just six months later. And according to Fortune Business Insights, the streaming video market could grow at a CAGR of 12% over the next seven years, taking it to $843 billion by 2027.

Roku is one of those companies that can grow for longer than you expect.

All that said, it could be best to lock in profits on part of your position (if you bought Roku) or hold off (if you’re looking to get in). ROKU seems to have exhausted most of its short-term upside, and shares are now in overbought territory.

Keep a close eye on ROKU. A sharp pullback can come at any time for the high-flyer and would present a potential buying oopportunity.