Why Hasn't Roku (ROKU) Broken Out?

Tech stocks are firing on all cylinders in this late summer rally, but Roku, Inc. (ROKU) has failed to join the party, stalling below 2019 resistance in July and slumping badly into mid-August. Accumulation hasn't taken a hit yet, but shareholders must be getting impatient watching other streaming content plays lift to new highs as a result of the pandemic and its beneficial impact on at-home entertainment.

Key Takeaways

  • Roku has posted a string of quarterly losses and expects to lose money through year end.
  • The stock is still trading below 2019 resistance.
  • The $18 billion market cap will be tough to maintain without profitable quarters.
  • Earnings are highly dependent on cyclical advertising revenue.

Skeptical investors may have noticed that the stock is very expensive, currently valued at over $18 billion, but the company still hasn't found a way to book quarterly profits. That negative theme continued during the Aug. 5 earnings release, with the company posting a loss of $0.35 per share even though revenue rose an impressive 46% year over year. A spokesman then told analysts to expect losses for the rest of the year, taking the wind out of a generally upbeat presentation.

As it turns out, Roku is highly dependent on advertising income, which is a bigger profit driver than strong hardware sales or streaming subscriptions. The ad revenue stream isn't likely to improve until 2021 at the earliest, with an ongoing recession and tens of millions still out of work. At its core, it's the same dilemma faced by Alphabet Inc. (GOOGL), offering one reason why their charts look strikingly similar.

A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It has typically been recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment.

Wall Street consensus on Roku stock has deteriorated in recent months, probably due to continued losses in the middle of well-publicized "streaming wars." It's currently rated as a "Moderate Buy" based upon ten "Buy," six "Hold," and two "Sell" recommendations. Price targets range from a low of $65 to a Street-high $208, while the stock opened Tuesday's session $13 below the median $160 target. Roku has booked just one positive note since earnings, with Deutsche Bank initiating coverage with a "Buy" rating.

Roku Daily Chart (2018 – 2020)

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

Roku came public at $15.78 in September 2017 and entered a strong uptrend that topped out in the upper $50s at year end. A steep pullback into April got bought, lifting shares back to the high in August. An immediate breakout reached $77.57 in October, ahead of downdraft that triggered a failed breakout. Selling pressure eased in December after the decline undercut the April low, giving way to an equal but opposite reaction that completed a V-shaped recovery in March 2019.

A May cup and handle breakout powered up to an all-time high at $176.55 in September and rolled over, carving a double top that broke to the downside in March 2020. The selloff found support at a 10-month low, ahead of a multi-legged recovery wave that stalled six points below the 2019 high in July. The stock failed a breakout attempt about two weeks ago, yielding shallow downside that is now testing six-week rectangle support.

A double top is an extremely bearish technical reversal pattern that forms after an asset reaches a high price two consecutive times with a moderate decline between the two highs. It is confirmed once the asset's price falls below a support level equal to the low between the two prior highs.

Roku Short-Term Outlook

It's sink-or-swim time for the volatile growth play, with a breakdown through $140 raising the odds for continued downside into the 200-day exponential moving average (EMA) near $123. On the flip side, the stock needs to break strong resistance in the mid-$160s to test and potentially mount the 2019 high. Recent earnings failed to ignite that bullish price action, and weekly relative strength indicators have taken note, initiating sell cycles that now favor a bearish outcome.

The Bottom Line

Roku stock has failed to break out above 2019 resistance, with weak advertising revenues undermining a strong post-March recovery.

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

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