Feb 12, 2020 San Jose / CA / USA – Roku logo at their HQ in Silicon Valley; Roku Inc manufactures a variety of digital media players that allow access to Internet streamed video or audio services

The Roku stock price has struggled lately. After surging to an all-time high of $486 in February, the shares have dropped by more than 30% to the current $330. The company is now valued at more than $44 billion.

Rotation from growth 

Roku is a fast-growing company that has the biggest market share in the television streaming industry. The company sells a simple television stick at a throwaway price and then makes more money from its advertising business.

Roku was one of the leading beneficiaries of the coronavirus pandemic. As more people stayed at home, they spent most of their time watching. As a result, the company recorded more than $1.77 billion in revenue in 2020 up from the previous $1.1 billion. Its net loss narrowed from more than $59.9 million to more than $17 million.

This growth continued in the first quarter of this year as its revenue grew by 79% to more than $574 million. It beat the consensus analysts by a whopping $82 million. Its earnings per share came at $0.54, better than expected. These results came as the number of player units increased by 14% while its platform revenue rising by 101%.

The Roku stock price has therefore declined mostly because of the ongoing rotation from growth to value stocks. There is also a rotation from companies that did well during the pandemic to those that underperformed. The idea is that investors believe that growth will start to ease as the economy reopens and people go back to work.

Further, the recent strong economic data from the United States have fueled speculation that the Fed will start tightening. Inflation has jumped and the labor market has tightened. On Thursday, data showed that initial jobless claims declined below 400k for the first time since the pandemic started. Historically, growth stocks tend to underperform when the Fed is tightening.

Overvalued but..

In all honesty, Roku seems like a highly overvalued company. For one, this is a loss-making company with less than $2 billion in annual revenue that is valued at more than $44 billion. However, in an era of low interest rates, these discrepancies in valuations are relatively understandable.

Indeed, in the past decade, investors who bought undervalued companies have done worse than those who opted for overvalued firms.

Roku buyers invest in the company because of its strong market share and the opportunity it has in original content and advertising. In original content, the company has already bought the catalogue of the now-defunct Quibi. It has also signed up for the first pay one deal with Saban Films. 

Analysts are also optimistic about the Roku stock price. In a recent note, analysts at Citigroup lowered their target to $450, which is still substantially higher than the current level. Similarly, those at Evercore, KeyCorp, Oppenheimer, and Morgan Stanley have a target of above $400.

Roku stock price analysis

Roku Stock Price
Roku stock price chart

Turning to the daily chart, we see that the Roku stock declined to $272 a few weeks ago. This was a notable price since it was along the 50% Fibonacci retracement level. It then bounced to a high of $359. A closer look shows that the stock did what looks like a double-bottom pattern whose neckline is at the 23.6% Fibonacci retracement level at $400. It is also struggling to move above the 50-day and 25-day exponential moving averages. 

However, another closer look shows that the stock is also forming what looks like a head and shoulders pattern, which is usually a bearish signal.

Therefore, at this stage, the outlook is neutral. But, a move to the neckline at $400 will send a signal that there are still buyers left in the market. This will see the shares jumping to the all-time high. 

On the other hand, a drop below $320 will signify that the head and shoulders pattern has been validated, which will see the stock drop back to the 50% retracement at $272.

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