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

Roku Inc. (ROKU) shares are slipping by nearly 7 percent following a downgrade to underweight by Morgan Stanley, which noted that investors were too positive about Roku's subscriber growth. But that is likely the beginning of more drastic declines for Roku stock. There are several reasons including: Roku's weakening technical charts, the rush of investors seeking to short the stock, and a looming lock-up expiration that will flood the market with more shares.

An Investopedia article on December 6 pointed out and discussed all of the fundamental flaws in the Roku story. (See more: Why Roku Shares May Fall 30% Further.) Yet the stock has continued to climb by over 16 percent since then. Those issues have remained, but the trading in Roku may finally be catching up with the fundamental flaws in the stock.

One red flag is the rising price short sellers must pay to borrow Roku shares. 

Short Sellers Piling In

(Interactive Brokers)

Short sellers appear to have many reasons to be bearish on the stock, and the cost to borrow shares has recently jumped from an already high annualized rate of 25 percent to 32 percent, indicating shorts are now piling back into Roku. 

The cost to borrow Roku has remained elevated for some time, but as the chart above shows, that cost took a major jump on January 4. It indicates short sellers are having a difficult time finding shares of Roku to borrow, and are willing to pay a high price to short the stock. 

ROKU Chart

ROKU data by YCharts

Technicals Breaking Down

Technical analysis indicates Roku is also exhibiting signs of stress, with volume that continues to diminish, and a relative strength index (RSI) that continues to trend in a lower direction. The RSI reading has been declining since peaking in early November and has had a series of lower highs, while the stock has steadily increased – a divergent bearish indicator. Additionally, the stock has now broken a rising trend line in another bearish sign that shares could be headed lower from here. 




Lock-Up Expiration

The float in Roku is still relatively small, with approximately 17.5 million shares, according to Yahoo! Finance. But that will get much larger after lock-up expiration 180 days after the company came first came public and filed its prospectus on September 27, 2017. After the expiration of the lock-up, all 79 million Roku shares will become available for sale, of which approximately 67 million are held by executives, directors, and affiliates, according to an SEC filing. 

Roku shares have surely had a rapid rise, which means a fall could happen just as quickly, if not faster. 


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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