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

Roku Inc.'s (ROKU) stock has soared for most of 2018, rising by nearly 50% through the start of October. But things can quickly change – since hitting an intraday high of approximately $77.50 on October 1, the stock has plunged by nearly 30%. The bad news is that the stock price may be due to decline an additional 12%, based on technical analysis.

The options market is suggesting that there is a period of massive levels of volatility on the way. That is because the company is due to report third-quarter results on November 7 and analysts are looking for strong revenue growth from the streaming media device company.  

ROKU Chart

ROKU data by YCharts

Weak Chart

The stock is now nearing technical support at $52.75. Should it fall below that, the stock is likely to drop to $48.20. Additionally, at $48.20 there is a massive gap created after the company reported better than expected second-quarter results. The stock appears to be working its way lower in an attempt to refill the gap, which is another bearish indication.

Bullish Momentum Leaving 

The relative strength index (RSI) has been trending lower since the end of September, indicating momentum is leaving the stock. Additionally, the RSI failed to make new highs despite the stock price continuing to rise in August and September, which is another bearish technical indicator. 

Uncertainty Ahead

The options market is pricing-in a great deal of volatility for the stock ahead of third-quarter results. The options expiring on November 16, using the long straddle options strategy, suggests that the stock price may rise or fall by as much as 20% from the $55 strike price.

Analysts are Bullish

Analysts, on the other hand, see shares of Roku rising by 22% to an average price target of $66.55. That target has been revised higher since July from $44.22. But of the 12 analysts covering the stock, only 58% rate it a buy or outperform while 42% rate it a hold.

ROKU Annual EPS Estimates Chart

Third-quarter earnings are estimated at a loss of $0.11 per share, while revenue is forecast to have grown by 37% to $170.7 million. The good news is that analysts have been raising their full-year revenue estimates for 2018, and now see revenue increasing by 41%, up from 36% in July. Additionally, analysts now see the company losing $0.14 per share, which is better than the prior estimates for a loss of $0.28. 

Analysts see the company at nearly breakeven in 2019 and earning a profit of $0.46 per share in 2020. But even with the company on the road to profitability, it leaves the stock trading at a very lofty valuation, and the shares vulnerable to further declines.

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.