(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Roku Inc. (ROKU) shares have come under tremendous pressure to start 2018, and have already fallen by nearly 15 percent. But that decline is still likely not finished as short interest continues to climb. The technical chart continues to deteriorate and suggests shares could continue to fall by another 13 percent to roughly $38.
The options market is also looking for massive levels of volatility in Roku shares over the next few weeks, suggesting the stock of the streaming media device maker could move higher or lower by nearly 20 percent by expiration on February 16.
Weak Technical Chart
The chart below shows how the stock is now trying to base around $43, but is trending materially lower. The chart shows a downtrend was created after the stock peaked in mid-December. Additionally, trading volume has been starting to rise as the stock's price is falling, which suggest more sellers may be piling in to the stock.
Meanwhile, the relative strength index (RSI) has trended lower since peaking in early November. The RSI reading currently stands at only 45, and would need to fall below 30 before the stock could be viewed as oversold. (See also: Overbought Or Oversold? Use The Relative Strength Index To Find Out.)
Should Roku stock be able to hold its current price around $43, it will likely fall to about $38, a decline of roughly 13 percent from current levels. A drop below $38 sends the stock sharply to around $32.
Surging Short Interest
Roku has seen its short interest climb in recent weeks, with the short interest as of December 31 at 6.5 million shares short, up by over 10 percent on December 16. The current short interest stands at nearly 42 percent of the float, a very high level.
There are signs that the short interest may be rising, as the cost to borrow shares to short the stock continues to increase, and now stands at 36 percent on an annualized basis. That cost has risen by nearly 12 percentage points, just since January 3.
The options market is betting volatility in Roku will be high over the next few weeks, with implied volatility for the options set to expire on February 16 at almost 81 percent. That is a massively high level – nearly 10 times higher than the S&P 500's implied volatility of 8. Meanwhile, the long-straddle options strategy using the $45 suggest Roku shares could rise or fall by nearly 20 percent over the next 35 days.
There seems to be a big bull/bear debate forming in shares of Roku, and perhaps the next earnings results will shed some light on where the stock's next stop is.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.