Roku, Inc. (ROKU) stock posted a phenomenal 247% return in 2020 and has started 2021 on the right foot, adding another 41% in less than two months. Unfortunately, the company has booked just one profit in the past four quarters, raising doubts about the sustainability of current price levels. Estimates for this week's fourth quarter release probably won't help matters, with Wall Street analysts expecting a loss of $0.03 per share.

Key Takeaways

  • Roku reports fourth quarter 2020 earnings after Thursday's closing bell.
  • The stock has gained more than 40% so far in 2021.
  • The rally is nearing Wall Street's most ambitious price target.
  • The stock isn't technically overbought despite historic share price gains.

In addition, the trading tone for streaming service providers is starting to cool off, as illustrated by the bull trap and downdraft after Dow component The Walt Disney Company (DIS) reported outstanding fourth quarter results last week. The same thing happened to Netflix, Inc. (NFLX) after its Jan. 21 release, suggesting that aggressive sellers will be rounding the wagons ahead of this week's Roku confessional.

Roku sells hardware digital media players that offer access to streaming media content from various online services, rather than streaming services themselves. But it has benefited from the same pandemic tailwind that has generated massive Disney+ subscription growth. Given the brutal second wave, the upcoming report should feature metrics on par with the third quarter's 73.1% year-over-year revenue surge. However, the market has stopped rewarding COVID beneficiaries and is narrowly focused on a return to normalcy in the second half of the year, raising the odds for a sell-the-news reaction.

Even so, Roku stock isn't particularly overbought after its historic run because the rally off the March 2020 low has carved periodic consolidation patterns that have eased technical extremes through time rather than price. In addition, selling pressure into this week's report has been nearly non-existent, keeping accumulation readings near highs, even though many of 2020's biggest winners have struggled since the calendar flipped into January.

Valuation is another story. Roku stock currently sports a mammoth $55.8 billion market cap, larger than half of Nasdaq-100 index components. Wall Street has taken note of this apparent insanity, posting a median price target of $365, more than $100 below this morning's opening print. More importantly, Roku is also trading just $30 below the Street-high $500 target posted by the most bullish analyst.

Tip

Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.

Roku Weekly Chart (2017–2021)

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 two months later, lifting into the mid-$70s in the fourth quarter of 2018. A May 2019 breakout attracted intense buying interest into September, topping out above 175 and rolling into a two-legged correction that found support in the $50s in March 2020. Aggressive buyers returned into the third quarter, completing a round trip into the first quarter peak in September.

The rally has now exceeded all harmonic reward targets, lifting above the 3.0 Fibonacci extension. This is extremely rare without a series of steep pullbacks, but the price has spent little or no time stretching outside the top 20-week Bollinger Band®, which would set off a major sell signal. This is a technical marvel for a momentum play, which invariably gets "ahead of itself." It's also the reason why bulls could defy the odds this week and lift the stock above $500.

Tip

Fibonacci extensions are a tool that traders can use to establish profit targets or estimate how far a price may travel after a retracement/pullback is finished. Extension levels are also possible areas where the price may reverse.

The Bottom Line

Roku stock is overpriced but not overbought ahead of this week's fourth quarter earnings release.

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