Is Roku Setting Up For Next Big Price Move?

Streaming entertainment specialist Roku NASDAQ: ROKU has been shaping a consolidation after pulling back from its February 16 high of $486.72. 

Roku is the largest streaming company in North America, selling more smart TVs last year than rivals. Industry analysts believe that dominance will give the company negotiating power for content deals.

Earlier this year, Roku acquired more than 75 shows from shuttered production company and app Quibi. 

On Wednesday, Roku said it would rebrand the shows as “Roku Originals,” for launch on the Roku Channel. The company will announce more details on the programming launch next month. 

With targeted advertising on the rise for streaming content, Roku this month closed its acquisition of Nielsen’s Advanced Video Advertising unit. The acquisition will boost Roku’s audience measurement data for ad targeting. 

The company has yet to turn a profit, but Wall Street expects that to change in 2022, forecasting earnings per share of $0.56. That number has been revised higher recently.

Last year, Roku grew the number of accounts by 14 million, finishing the year with over 51 million customers. Streaming hours grew 55%, while monetized video ad impressions more than doubled in the fourth quarter. 

In the company’s last earnings report, in February, CEO Anthony Wood noted that one-third of U.S. homes are using streaming services rather than a traditional cable subscription. Just because Roku is well-positioned as a leader now, that doesn’t mean competitive threats aren’t coming down the pike. 

“Leading media companies are reorienting around streaming and launching new streaming services,” said Wood.

Look For International Growth

Further growth may come from outside the U.S. 

In the earnings call, chief financial officer Steve Louden said, “The U.S. as a market is much further ahead than the rest of the world. And historically, the vast majority of our account base has been in the U.S. Certainly, we're growing our international presence.”

Analysts’ consensus rating is a “buy.” The price target is $404.88, which represents a 15.66% upside. 

Roku reports its first quarter on May 6, with analysts anticipating a per-share loss of $0.18 on revenue of $489.58 million. Both would be improvements over the year-ago quarter. 

The company has a long history of beating analysts’ estimates, so it wouldn’t necessarily be a surprise to see that in the upcoming report. In fact, many stocks have a so-called “whisper number,” which is an unpublished estimate that many expect to see. Given the history of topping estimates, the whisper number could well be higher. 

Roku went public in September 2017, meaning it’s well within the window in which young growth stocks notch their best price gains. Year-to-date, shares returned 7.41%. Over the past year, the gain is 188.62%.

The stock began pulling back in mid-February. This was not a surprising development, as growth stocks in general have underperformed value in the past three months. 

The current base marks the first true consolidation since Roku broke out of its early 2020 pullback that occurred along with the global equity meltdown. It’s healthy and expected to see some profit-taking at this point. 

The closely watched  Ark Innovation ETF sold shares of Roku this week, but investors shouldn’t panic about that. All institutional buying - not just that of Cathie Wood and the Ark funds - can propel a stock higher. After forming a base, a promising growth stock will often resume its rally. That may happen after a news catalyst, such as an earnings report. 

Mutual fund ownership of Roku rose over the past three quarters, which is evident in the stellar rally. There’s clearly been some selling lately, but it’s not out of control. 

Shares closed Thursday at $350.06, down $6.56, or 1.84%. Trading volume was below average, as it’s been for the past two weeks. Tepid volume is a good sign during a correction, indicating that selling may be settling down, and there are more holders now. 

At this point, it’s a little early to attempt a buy, as the stock may correct further. Watch for the stock to begin trending higher in heavy volume, as it approaches the previous area of resistance at $486.72.