Roku, Inc. (ROKU) rallied more than 12% to an all-time high on Friday after posting a third quarter 2020 profit of $0.09 per share, handily beating estimates for a $0.42 loss. Revenue rose 73.1% year over year to $451.66 million, also beating consensus by a wide margin. The streaming hardware provider added 2.9 million active accounts during the quarter while average revenue per user (ARPU) rose to $27.00, up 20% year over year. The company now expects fourth quarter revenue growth in the "mid-40% range."

Key Takeaways

  • Roku rallied to an all-time high on Friday after beating third quarter earnings expectations.
  • The stock is selling off on Monday after Pfizer Inc.'s (PFE) blockbuster vaccine news.
  • A pullback to $200 could offer a low-risk buying opportunity.

The stock added 12 points in Monday's pre-market and sold off with other COVID-19 beneficiaries after Pfizer reported positive results with its vaccine candidate. However, cord cutting started at least five years before the pandemic struck, and the world isn't going back to traditional broadcasting any time soon. If anything, the virus has underpinned permanent market share from an older demographic that needed a good reason to make the switch.

Wall Street consensus is mixed after 2020's impressive share price gains, with a "Moderate Buy" rating based upon 12 "Buy," 4 "Hold," and 2 "Sell" recommendations. Price targets currently range from a low of $75 to a Street-high $300, while the stock opened Monday's session just above the median $230 target. It has now traded through that level as additional pandemic buying momentum gets unwound.

bull trap is a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level. The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions.

Roku Daily Chart (2017 – 2020)

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

The company came public at $15.78 in September 2017 and posted an all-time low at that price level. Committed buyers jumped into new positions in November, lifting the stock into the upper $50s in December. It pulled back into April 2018, posting a higher low, ahead of renewed buying interest that triggered a breakout to new highs in August. This rally leg topped out in the mid-$70s in October, ahead of a decline that sliced through the summer low at year end.

Buyers returned in 2019, carving a round trip into the prior high in March. Bullish price action completed a cup and handle breakout in May, lifting into the $170s in the third quarter. That marked the highest high for the next year, ahead of a double top pattern that broke to the downside during the first quarter's pandemic decline. It fell to an 11-month low in March and turned sharply higher, reaching the 2019 peak in September.

The stock completed a breakout a few weeks later, entering a buying wave that topped out at $239 in October. It rallied above that level on Friday but opened Monday's session near $231, setting off a failed breakout. The bearish signal is adding to short-term selling pressure, perhaps dropping Roku stock into the 50-day exponential moving average (EMA), now rising through the $200 level. In turn, that psychological level might offer a low-risk buying opportunity, ahead of much stronger action.

A failed break occurs when a price moves through an identified level of support or resistance but does not have enough momentum to maintain its direction. Since the validity of the breakout is compromised and the profit potential significantly decreases, many traders close their positions.

The Bottom Line

Roku stock broke out above resistance at $239 on Friday and rallied to an all-time high at $255. It turned tail on Monday after bullish vaccine news and could drop to the $200 level in coming sessions.

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