(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Roku's Inc. (ROKU) was one of the hottest stocks in 2017, with shares surging by nearly four-fold from its IPO price of $14. But the love affair faded quickly in 2018, with shares of the streaming media device maker plunging by nearly 42% from their highs of almost $56 in December. But now a technical analysis suggests that shares of Roku are poised to rise by about 14.5%, while some options traders bet shares rise by nearly 13%, from its current price of roughly $33. (For more, see also: Roku Shares Could Fall 50% Further.)
Roku's shares cooled quickly after the company reported guidance for the first-quarter of 2018 that was lower than expectations. The poor guidance sent shares plunging in the days and weeks that followed. Additionally, short sellers also piled into the stock ahead of lock-up expiration which occurred in the middle of March.
Roku's chart shows strong technical support which has been put in place around $30 over the past few weeks. Additionally, the stock has recently moved away from a downtrend which started when the stock peaked in December. The next level of resistance for Roku comes around $37.75, about 14.5% higher than its current price. Additionally, the relative strength index (RSI) for Roku has been trending higher since hitting oversold levels, below 30, in the middle of March, a bullish indication.
Declining Short Interest
Roku's short interest rose rapidly as the company's lock-up period approached in March. But since that time the short interest has plunged by nearly 38% since peaking at the end of March at 10 million shares, to approximately 6.2 million shares short by the middle of April.
ROKU Short Interest data by YCharts
The options set for expiration on June 15 show an open interest of about 5,300 open call contracts at the $34. The contracts cost roughly $3 per contract and would need to rise to about $37 just for the calls to break even, a gain of about 12.5%.
Big Volatility Ahead
The long straddle options strategy is looking for a rise or fall in Roku's stock of nearly 21%, a massive rise in volatility, through expiration on June 15 from the $33 strike. The cost to buy one put and one call is about $7. Meanwhile, the implied volatility is at nearly 80%, and almost six times greater than the S&P 500 's level of roughly 13.5%. (For more, see also: Why Roku Shares Are Up 5% Today.)
Analysts Are Bearish
But not all is bullish for Roku. Analysts have been trimming their price target on the stock since the end of March. The average price target on the stock has fallen by nearly 5% to $38.60 from $40.75. Additionally, of the seven analysts that cover the stock only 29% rate the shares a "buy" or "outperform," while 57% rate it a "hold."
ROKU Price Target data by YCharts
Roku will need to deliver solid fundamental results if it wants any gains in the stock to more than just a short-term bounce.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the founder of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of two to three 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 recommendation made during the past twelve months. Past performance is not indicative of future performance.