Roku Stock Is Soaring – Is It Still a Buy?

Roku stock has soared 30% higher in just the last two weeks, thanks in part to growth in its content production department.

No longer content as just an over-the-top device that lets users stream content from other companies, Roku Inc. (NASDAQ: ROKU) has been quietly carving out its very own streaming service.

It’s done this in part by playing hardball with the companies who want their apps to appear on Roku’s devices. Roku has asked for rights for certain shows and movies from other companies in exchange for letting Roku users access their channels.

That’s helped it grow a modest library of third-party content. But now it is rolling out original content as well, including a live talk show hosted by pop star Demi Lovato.

That has investors eager to jump into the tech stock despite its hefty runup over the last few years. Roku stock is up 277% over the last year alone. A totally new streaming service alongside its already successful devices could launch it even higher.

Here’s whether you should follow suit…

Why Roku Stock Keeps Going Up

The cord-cutting and content streaming revolutions were developing nicely before the pandemic sent the public into lockdown. Lockdown poured gasoline onto the fire, and most streaming services showed increased subscribers and viewership.

One of the biggest beneficiaries has been Roku. Roku is the leader in cord-cutting and streaming services. It currently has more than 50 million active users who watched more than 40 billion hours of content over the past year.

Roku doesn't just make money from streaming. It sells hardware as well, like the Roku players and even Roku televisions. Roku televisions have been exceptionally strong, with the Roku TV program gaining market share in the U.S., Canada, and Mexico. Its operating system remains the No. 1 Smart TV OS in the United States.

Viewers using Roku can access all the popular streaming networks like Netflix, Hulu, Disney Plus, Amazon Prime, and Apple TV. Increasing viewers are turning away from more expensive cable platforms to streaming services like Roku that offer a wide range of channels that allow for a more a la carte approach to home entertainment.

That’s what has made Roku stock an exciting investment for the last four years, powering Roku shares 1,200% higher.

But what’s firing up investors now is Roku’s development of its own original content.

The Roku channel has a library of more than 40,000 free movies and television programs and over 190 live, linear channels already offered to viewers. Roku also has its own channel offering classic TV and movies as well as original content. In May, Roku added Roku 30 original series to The Roku Channel, starring top names like Kevin Hart, Anna Kendrick, and Jennifer Lopez. That drove record subscriber growth for the channel.

While streaming is a highly competitive market, Roku works hard to maintain and grow its market share. Over half of its workforce is dedicated to research and development to keep it on the cutting edge of the market for both content and hardware.

Roku is off to a strong start in 2021. Roku reported that net revenue grew by 79% year over year to reach $574.2 million in the most recent quarter. Roku reported that it earned a profit of over $75 million in the first three months of the year compared to a loss in the first quarter of 2021.

That was the fourth consecutive positive earnings surprise and the third straight triple-digit positive surprise posted by Roku. That has sent Wall Street analysts scrambling to raise their estimates for the company, which is usually a good sign for short to intermediate stock performance.

Roku may run into some headwinds later this year from supply chain issues related to its Television and Players components, but they should subside pretty quickly.

For now, everything is working for Roku, and money continues to flow into the stock. Brokerage firms have been raising their price target, and institutional money continues to flow into the stock.

Should you join them and buy a share of Roku at current prices?

Roku Stock Is a Buy as a Momentum Play

As always, whether to buy is a question of time frame and temperament.

As a growth and momentum stock, Roku is an excellent buy at current levels. Both fundamental and price momentum have been strong. The company is posting positive earnings surprises, and analysts are raising their estimates.

Looking at the technical picture, the stock is well above the 50- and 200-day moving averages alike. The 20-day moving average crossed over the 50-day in mid-June, giving us a very bullish setup for the short term.

Relative strength is high at 76 but is still moving higher.

If you buy Roku for a momentum trade, we suggest setting a stop at around $400, or a 10% loss.

For those with more of a long-term mindset and looking to add Roku for long-term exposure to streaming, this might not be a good time. The stock is up over 250% over the last year, and valuations are stretched. No matter how good the business is, stock at 28 times sales and over 500 times earnings is not usually a sound long-term strategy.

Roku is a fantastic company, but anytime your competition includes Amazon, Google, and Apple, you are vulnerable. By keeping the prices of its players and TVs below the competition, Roku has been able to stay ahead of the curve. That will get tougher to do over the next few years. Plus, competing with the big streaming services for original content is going to be costly. Paying a premium valuation probably will not end well for those looking to hold the stock long term.

We would wait for a much better entry point to add Roku in a long-term buy-and-hold portfolio.

Three Stocks We Like Even More Than ROKU

Our Shah Gilani just named three stocks he says are “screaming buys” right now.

All three are trading at a discount… are under-the-radar companies most people haven’t even heard of… and have massive tailwinds with the potential to make their prices skyrocket.

Go here to watch Shah give you the company names, tickers, and price targets for three stocks that belong in EVERY portfolio.

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