Roku's Stock May Be Heading for a Steep Decline

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Roku Inc.'s (ROKU) stock has been on fire since the beginning of April with shares rising by more than 126%. The company has delivered better than expected revenue and earnings results over the last two quarters, helping to fuel the rise. But the run higher may have been too much for the streaming media company. Shares could drop by approximately 19% based on analysts’ average price targets. (For more, see also: Roku's Battered Stock May Rebound 12%.)

Technical analysis also suggests the stock may have increased too fast and may fall by as much as 25% from its current price of approximately $70.50.

ROKU Chart

ROKU data by YCharts

Upping 2018

The stock rocketed higher in the middle of August after posting better than expected results and strong guidance. The strong results have prompted analysts to boost their earnings estimates on the stock for the rest of 2018. Analysts' forecast the company to lose $0.16 per share, better than previous estimates for a loss of $0.28 in the middle of June. Revenue estimates also increased and are forecast to climb to $722 million from the previous forecast of $698 million.

2019 and 2020 Get Worse

But the outlook for 2019 and 2020 gets worse. Analysts’ earnings estimates for 2019 drop to a loss of $0.06 per share from a forecast for a gain of $0.02. Meanwhile, earnings for 2020 fall to $0.43 from earlier estimates of $0.55.

ROKU EPS Estimates for Next Fiscal Year Chart

ROKU EPS Estimates for Next Fiscal Year data by YCharts

Despite the lower earnings estimates, revenue is forecast to improve for the company, rising to $971.6 million from previous estimates of $922.5 million for 2019. Meanwhile, 2020 revenue estimates increased to $1.29 billion from the prior forecast of $1.21 billion. The diverging earnings and revenue reflect expectations that costs will be rising, and that margins will fall. (For more, see also: Roku Shares Could Fall 50% Further.)

A Price Target of $57

The stock's current price target may be another reason why analysts are not more bullish on the stock, with an average price target of about $57. It is worth noting that the price target is up by more than 39% since the middle of June when it was $41.

Bearish Chart

The technical chart also suggests the stock may have run ahead of itself. The relative strength index (RSI) has reached overbought levels above 70 four times since June. Additionally, the RSI has been trending sideways since June, despite the stocks huge run higher—a bearish divergence. Should shares fall, the first level of support comes at $64.25, about 9% lower. Should that support level not hold, the stock could drop to roughly $52.75, almost 25% lower than the current price.

There is no doubting that the short-term outlook for the company is improving. But the stock may have run up too fast, especially given the deteriorating longer-term earnings estimates.

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 holdingsInformation 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.

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