Roku Stock Down 8% in September – Time to Buy ROKU Stock?

The price of Roku stock has been on a downtrend since the company posted a double-top formation back on 27 July. Back then, the price action rejected a climb above the $490 mark while some downbeat comments from the management during the company’s Q2 2021 earnings call contributed to accelerating the decline in the days that followed.

Currently, the stock is trading 34% below its 52-week high as market participants expect that the tailwind provided by the pandemic may soon dissipate, leaving the company with a tough road ahead to keep posting elevated growth rates amid a now higher comparable.

Can Roku’s current downtrend reverse at some point in the future or is this streaming stock poised to experience further losses in the next few months? In the following article, I’ll take a closer look at Roku’s price action and fundamentals to possibly answer that question.

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Roku Stock – Technical Analysis

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Roku (ROKU) price chart – 1-day candles with multiple indicators – Source: TradingView

The price of Roku stock has broken an important trend line support and momentum oscillators have plunged to their lowest levels in months following this downbeat guidance from the management team.

During the three months ended on 30 June, the company added only 1.5 million new users to its platforms resulting in 55.1 million active accounts – a figure that was lower than the 57.7 million analysts from Wedbush had estimated for the period.

Meanwhile, the number of hours of content streamed during the quarter came in significantly lower than estimated while they declined on a quarter-on-quarter basis from 18.3 billion on Q1 to 17.4 billion on Q2.

During the earnings call that accompanied this latest quarterly release, Roku’s CFO, Steven Louden, stated that the company will be facing “tough year-over-year comps” during the second half of 2021 as the pandemic prompted an unexpected surge in the company’s subscriber base and usage volumes.

It seems evident that these comments have modeled the price action for Roku as the stock is embarked in a sharp falling wedge formation.

However, this decline may have already gone too far and the stock could be ready for a strong technical rebound on the back of overly pessimistic momentum readings and a typically bullish wedge pattern.

Moving forward, a break above the upper bound of the wedge could lead to a full-blown trend reversal for Roku as the market may have already corrected the slowdown caused by a potentially fading pandemic tailwind.

Above-average trading volumes would confirm the break while it would also be positive to see the stock surging past its short-term simple moving averages for further confirmation.

Roku Stock – Fundamental Analysis

Roku’s top-line results had been growing at a fast pace even before the pandemic stroked, with total revenues for the video streaming company moving from $399 million in 2016 to $1.13 billion by the end of 2019 at a compounded annual growth rate (CAGR) of 41.5%.

Moreover, the firm has been progressively improving its gross margins while it swung to positive GAAP EBITDA last year for the first time in its history.

Moving forward, even though the company’s growth may decelerate to some extent compared to its pandemic levels, the firm’s historical performance shows that Roku has already demonstrated its ability to grow at an accelerated pace without the presence of a “black swan” catalyst of the likes of a global pandemic.

That said, at its current market capitalization of $43 billion, the firm is trading at 15 times its forecasted sales for this year. Moreover, its EV/EBITDA – using the firm’s 2020 adjusted EBITDA figure – is standing at 176%. It is worth considering that the firm’s adjusted EBITDA jumped from $36 million to $150 million in just a year resulting in a 317% year-on-year jump.

What these multiples show is that the firm’s valuation, despite its eye-popping growth, seems rather stretched. However, Roku meets all the criteria to qualify as a top growth pick and, considering the multiple sources of revenue that the company could still tap on and the favorable trends that are lifting the streaming industry as a whole at the moment the runway could still be free and clear for the business to become a $100 billion company in the future.

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About Alejandro Arrieche PRO INVESTOR

Alejandro is a freelance financial analyst with 7 years of experience in the industry. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing, macro analysis, and technical analysis. Other publications Alejandro has written for include The Modest Wallet, and Capital.com.