Roku stock is down 7% – Time to Buy ROKU stock?

The price of Roku stock went down 7% last week as tech stocks as a whole have demonstrated signs of weakness after a seemingly unstoppable rally, with Roku stock delivering a 25% gain in June on the back of multiple positive announcements.

Back in mid-June, Roku’s management told investors that it planned to sell TVs with a built-in Roku device in the United Kingdom while the company said only a day after that it saw a record increase in the number of unique accounts that streamed the company’s Originals channels during the two weeks that followed its launch.

According to the announcement, the channel, which was launched roughly two months ago, is currently reaching over 70 million people in the United States, with one in three Roku users streaming at least one of Roku’s in-house productions during these first two weeks.

The company said that it plans to launch as many as 45 new productions this year to be added to the channel’s extensive library comprised of more than 40,000 movies.

Could these positive announcements limit the downside potential of Roku shares during this seemingly ongoing broad-market weakness? In the following article, I’ll take a look at Roku’s price action to see what the technical setup is indicating will also digging into the firm’s fundamentals to see if this could be an opportunity to buy Roku shares are an attractive price.

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ROKU stock – technical analysis

The latest price action seen by Roku shares shows how the price peaked at $459 per share back on 30 June at a moment when the Relative Strength Index (RSI) was flashing overbought.

Including today’s indicated pre-market downtick, Roku is accumulating a 5-day losing streak, with momentum oscillators already moving down their previously elevated readings while the MACD has flashed a sell signal.

The stock has also broken below its 20-day moving average support and seems embarked on a trip toward tagging the lower trend line shown in the chart at around $385, this being the next support level to watch if this current bearish momentum continues during the rest of the week.

For now, there is a small 3% to 4% downside risk for Roku stock as long as that trend line support holds. However, if the price action breaks below that line, chances are that the instrument could face a full-blown return to the mean, eyeing the $340 level as a plausible next support, which is the stock’s 200-day moving average.

ROKU stock – fundamental analysis

Roku has been managing to push its sales higher at a remarkable pace, with annual revenue growth accelerating in the past three years from 45% in 2018 to as much as 57.5% last year. Meanwhile, top-line results have already moved 63% higher during the last twelve months as the company continues to benefit from the cord-cutting trend.

Roku’s profitability margins have also been improving lately, with the firm managing to push its gross margin from 44.7% in 2018 to nearly 49% during the past twelve months while Roku has swung to positive EBITDA already – an important achievement for a growth stock.

During the first quarter of 2021, Roku reported its third consecutive profitable quarter, with operating income surging to $75.8 million compared to a $55.2 million negative figure it reported during the same period a year ago.

Quarterly profitability has moved from $12 million during the third quarter of 2020 to current levels at an indicated quarterly compounded growth rate of 151.3%. For this year, analysts are expecting to see sales jumping 55% at $2.75 billion while GAAP earnings per share are expected to land at $0.33 resulting in a significant improvement compared to the $0.14 loss per share reported by Roku during 2020.

Interestingly, the company is maintaining a seemingly pessimistic outlook for its profitability for 2021, with net income expected to land at $10 million – a figure that can only be reached if the company posts losses in the last two quarters of the year.

The management cited the end of the pandemic as the headwind causing this reversal in the latest profitability uptrend, even though the scenario might have changed lately amid the rise of the Delta variant in multiple corners of the world.

Roku is currently trading at 18 times its forecasted sales for 2021 while the company has nearly no debt. If we were to assume that Roku can manage to maintain a net profit margin of around 10% in the future, we could see the company bringing around $500 million in net profits by 2023 based on current sales forecasts.

This would result in a forward P/E ratio of 102 that seems a bit stretched if we estimate a compounded annual growth rate in earnings of 30% to 50% moving forward.

However, if the price of Roku were to move down around 10% in the following weeks, this could be an opportunity to acquire the shares of a promising growth company with a conservatively financed balance sheet at a decent price.

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