(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Roku Inc. (ROKU) already has fallen nearly 25 percent so far in 2018, but the bad news may not be over.
The stock could be set to fall another 50 percent further to about $18. That's based on an analysis of the technical charts as well as the startling increase in the borrow rate short sellers are paying for shares of Roku, which means the shorts are willing to pay sharply higher borrowing costs on the bet that Roku's decline will be more severe. The stock's outlook has worsened dramatically from only a few weeks ago. Roku makes streaming media players that enable customers to view streamed online video through their TVs. The company went public in September 2017 and has been a hotly watched stock since then.
The pending lock-up expiration, which is set to expire 180 days after the IPO date, could also flood the market with shares. That expiration maybe the catalyst behind the increased interest in shorting the stock. The prospectus on file on the SEC website notes that 79 million shares will become eligible for sale, of which 67.2 million are held directors, executives, and affiliates. The shareholder list shows venture funds holding positions as affiliates, and if distributed to limited partners, could put added selling pressure on the stock.
The chart shows that Roku has a line of support around $35, which would be a decline of about 11 percent from its current price of roughly $39.25. But the more significant problem occurs should the stock fall below that support line. (See also: Technical Analysis: Fundamental Vs. Technical.)
The chart shows the stock rocketed higher in nearly a straight line from November 8 through November 14 to roughly $45, rising an astonishing 140 percent. But should support at $35 be broken, the stock could very rapidly fall back to $18, with no technical support to stop it.
Rising Cost To Borrow
The cost to borrow shares of Roku has surged in recent days, to nearly 94 percent, dramatically higher than the rate of 56 percent we noted in an Investopedia article on February 28. That is a massive jump in the cost to borrow shares of the stock.
Borrow rates fluctuate on a daily basis, but a borrow rate of 94 percent means on an annualized basis, a trader is paying 94 percent of the notional value of the short position to borrow the shares. This implies Roku stock would need to fall by 94 percent over the course of a year just for the short seller to profit. In this case, a short seller is likely only making a short-term bet, and therefore the cost would be dramatically lower, making it far easier to profit because the stock would not need to fall nearly as much. (See also: What Is Short Selling?)
The shareholder list in the prospectus shows that the holders are reasonably concentrated. With a float of only 15.68 million shares currently, it would not take a much in the form of a distribution from a venture firm to put added pressure on the stock.
For now, the risk is rising that Roku shares could come under considerable selling pressure in the not-too-distant future. This seems like a big bet that short sellers are making, and paying incredibly high rates to do.
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.