Roku Stock Down 7% Leading Into August – Time to Buy ROKU Stock?

Roku shares slipped 7% during July while they slid 4.7% last Friday at $428.3 per share only days before the company reports its financial results covering the second quarter of the year.

According to estimates from Seeking Alpha, analysts are expecting to see revenues landing at $618.3 million by the end of these three months, resulting in a 73.7% jump compared to the figure reported by Roku during the same quarter a year ago as demand for its streaming devices and solutions continues to accelerate.

Meanwhile, the firm is expected to report positive GAAP earnings per share of $0.07 compared to minus $0.22 it reported a year ago while the firm forecasted gross profits of $300 million and an adjusted EBITDA of $65 million for the quarter resulting in a significant improvement compared to the negative $3.4 million it reported back in the second quarter of 2020.

Could Roku shares get propelled if the firm manages to hit these optimistic forecasts? The following article takes a look at the options market to see the kind of move that the market is expecting once results are out while also analyzing the latest price action to draft plausible scenarios for the share price.

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Roku Stock – Technical Analysis

The current implied volatility of options expiring by the end of this week for Roku is around 86.5% as per data from Barchart. By using this information, we can estimate that the market is expecting a 10% move in the price once the earnings report is out.

This is somehow in line with the single-day upticks/downticks that the stock has experienced in the past once quarterly reports have been released, which means that volatility is within historical ranges.

Based on the latest price action, a 10% drop in the stock could lead to a break of the trend line support highlighted in the chart while a 10% uptick would not lead to any significant development on the technical front.

Key levels to watch at the moment are $490 (the stock’s latest high) and $390 (the stock’s trend line support).

Prior to the release of these results, it is important to note that Roku shares are displaying a pronounced bearish divergence in both the Relative Strength Index (RSI) and the MACD, both of which have posted lower readings despite the price moving higher.

These divergences reinforce a bearish outlook for the stock and could lead to the kind of counterintuitive move seen by other names in the tech space that involved a drop in the share price despite the firm beating analysts’ forecasts for the quarter.

These moves often occur when most of those positive results have already been priced into the stock.

Roku Stock – Fundamental Analysis

Roku’s sales have been growing at a fast pace in the past three years at least, while growth rates have also been accelerating as a result of more consumers relying on streaming services to entertain themselves – particularly during the pandemic.

By the end of 2020, Roku sales landed at $1.78 billion resulting in a 57.5% jump compared to the previous year while analysts are expecting to see sales ending this year at $2.75 billion for a 54.8% advance.

The firm’s profitability margins have also been improving in the past years, moving from 44.7% in 2018 to 45.5% by the end of 2020 while they leaped to 56.9% during the first quarter of 2021.

Meanwhile, the company has been reporting a positive EBITDA for three quarters in a row now, with EBITDA margins landing at 16.6% during the previous quarter compared to 5.8% during the third quarter of 2020, the first positive EBITDA quarter.

This year, analysts are expecting to see the firm reporting its first year of annual positive profitability, with non-GAAP earnings per share expected to land at $0.39 while, moving forward, earnings are expected to double in 2022 while they are forecasted to leap 160% by the end of 2023.

By the end of the first quarter of 2021, Roku held a long-term debt of $390 million while it had $2.08 billion in cash and equivalent.

Based on analysts’ estimates for 2021, Roku is currently trading at almost 21 times its forecasted sales. At the moment, using the firm’s forecasted earnings to value the company would not be relevant as Roku doesn’t have the necessary track record to rely on those metrics yet.

Interestingly, analysts are expecting a deceleration in the firm’s revenue growth rates moving forward despite its positive track record. If that happens, there is a big chance that valuation multiples may shrink and that would result in a sizable downside risk for the stock.

Therefore, investors should keep an eye on how Roku sales evolve after the pandemic is over as the market capitalization of the firm could take a strong hit if those pessimistic scenarios materialize.

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