Roku Stock Gained More than 6% in Early Market Trading

Roku (ROKU) shares rose nearly 6.5% in early market trading today. The broader indexes are also trading higher. While the Dow Jones Industrial Average has risen by 140 points or 0.54%, the S&P 500 Index has gained 0.7% at the time of this writing.

Tech ETFs including XLK, SOXX, and SMH have gained 1.23%, 1.5%, and 1.7%, respectively. While the broader market has been volatile in October, Roku has gained 13%.

Will Roku stock continue to rise?

Although Roku stock is gaining momentum in October, it’s still recovering after a 40% drop in September. Investors were concerned about the company’s high valuation metrics and growing competition in the device streaming segment. Comcast and Facebook entered the high growth streaming device segment, according to a MarketWatch report.

Roku gained close to 450% in the first eight months of 2019. The stock was valued at $17 billion at its peak or 16x its 2019 sales. Now, the stock is valued at $13.5 billion or 12x its forward sales. Despite the pullback in September, Roku shares have returned 250% year-to-date.

Will the stock move higher heading into the fourth quarter? Investors will be waiting for the company’s third-quarter earnings. The company will likely release its earnings on November 6.

Analysts expect Roku to post revenues of $255.66 million in the third quarter—a rise of 47.3% YoY (year-over-year). Despite the strong growth in sales, analysts expect the company’s EPS to fall from -$0.09 to -$0.28 YoY.

One of the main drivers of Roku’s stock price is its ability to consistently beat analysts’ estimates. In the June quarter, the company’s earnings were 63.6% higher than analysts’ estimates. The company also beat the earnings forecast by 64%, 66.7%, and 25% in the first quarter of 2019, the fourth quarter of 2018, and the third quarter of 2018, respectively.

Why investors should not be too concerned over competition

Although Roku will be competing with tech giants like Apple, Facebook (FB), Amazon, Google, and Comcast (CMCSA) in the device streaming segment, investors shouldn’t be too worried. Roku still maintains a considerable lead in the streaming device market.

Second, the streaming business isn’t Roku’s primary segment. In 2018, the platform business sales rose 85% and accounted for 56.1% of total sales. The business accounted for 67% of the total sales in the June quarter. The platform business generates sales through licensing, advertisements, and subscriptions.

We know that Roku has licensed its technology to several TV manufacturers. The company gets a percentage cut every time a user subscribes to a streaming service on the Roku platform. With the addition of new streaming players like Apple TV+ and Disney+, Roku has the opportunity to expand its presence in content aggregation.

We shared the same sentiment earlier this month. We identified Roku as a solid pick after its decline in September. The company is vulnerable due to its high valuation. Roku will trade significantly lower on earnings or revenue miss or in a market sell-off. Since the company is still posting a non-GAAP loss, it will likely be profitable by 2022.

Analysts remain optimistic about the stock. They have a 12-month average target price of $131, which is 15% higher than the current price.

Market Realist analyst Aditya Raghunath doesn’t hold a position in any of the stocks mentioned above.