Roku, Inc. (ROKU) stock has completed a year-long consolidation pattern and broken out to an all-time high, setting the stage for superior returns in coming months. A measured move target near the $300 level is certainly "doable" if investors focus exclusively on rapid growth, but the company continues to bleed red ink on a quarterly basis, despite a historic opportunity to build market share as a result of the COVID-19 pandemic.

Key Takeaways

  • Roku stock has broken out after consolidating in a trading range for a year.
  • The company is losing money despite rapid growth.
  • The breakout yields a measured move price target near $300.
  • A pullback to $175 could offer a buying opportunity.

The company now boasts more than 43 million active accounts, with the large installed base supporting higher-than-average advertising rates. Cord cutting continues to take market share from traditional broadcasting at a rapid pace, and Roku is perfectly positioned to benefit from this multi-year paradigm shift. The company also plans to "explore" markets outside of North America in 2021, potentially offering a new revenue stream. Even so, profit margins could rise to the top of investor concerns at any time.

Wall Street consensus shows less enthusiasm than the investing public, with a "Moderate Buy" rating based upon 14 "Buy" and 5 "Hold" recommendations. Two analysts now recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $65 to a Street-high $228, while Roku shares opened Tuesday's session just $25 below the high target. This lofty placement suggests that further upgrades will be needed to sustain the uptrend.

Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits. Simply put, the percentage figure indicates how many cents of profit the business has generated for each dollar of sale.

Roku Daily Chart (2017 – 2020)

Daily chart showing the share price performance of Roku, Inc. (ROKU)
TradingView.com

The company came public in the mid-teens in September 2017 and entered a strong uptrend, topping out in the upper $50s in December. It settled into a trading range in 2018, charging higher in August and reaching the mid-$70s before turning tail in a failed breakout that relinquished all gains posted since November 2017. A 2019 recovery wave reached the prior high in March, ahead of a cup and handle breakout two months later.

The uptrend made steady progress into September 2019's high at $176.55, giving way to range-bound action, followed by a February 2020 breakdown that found support at an 11-month low in March. The subsequent bounce unfolded in two rally waves, finally completing a 100% retracement into the first quarter peak in July. Sideways action at that level completed another cup and handle-like pattern, ahead of a late-September breakout.

Roku Short-Term Outlook

The on-balance volume (OBV) accumulation-distribution indicator paused at resistance after the initial breakout and is just now hitting a new high that supports the uptrend. Even so, the shallow trajectory indicates hesitation that could yield a pullback to test new support at the red line near $175. The 50-day exponential moving average (EMA) and rising channel support are both headed into the same vicinity, suggesting a low-risk buying opportunity if a pullback does develop.

For now, it looks like the rally impulse could reach channel resistance above $225 as a first target, while the depth of the 12-month trading range generates a measured move target near $300 when added to the top of the consolidation pattern. Even so, the momentum wave that fueled so many breakouts over the summer months is now winding down, yielding more balanced, two-sided action that could slow or stall the advance.

A price target is an analyst's projection of a security's future price. Price targets can pertain to all types of securities, from complex investment products to stocks and bonds. When setting a stock's price target, an analyst is trying to determine what the stock is worth and where the price will be in 12 or 18 months. 

The Bottom Line

Roku stock has broken out to an all-time high with volume support, raising the odds for a sustained uptrend that could reach $300.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.