Hot rocket Roku Inc. (ROKU) is trading lower by nearly 3% in Thursday’s U.S. session after a KeyBanc downgrade interrupted a torrid advance that’s added nearly 30% to the stock’s value since the Sept. 21 breakout. Sidelined investors are hoping for even more downside in coming sessions because a pullback into the breakout level could offer a low-risk buying opportunity, ahead of continued upside into 2021.
Roku Explosive Growth
The on-demand hardware provider has opened more than 43 million accounts, with the sizable base allowing them to charge higher-than-average advertising rates. The exodus from traditional broadcasting continues to take market share at a rapid pace, while Roku is perfectly positioned to benefit from this one-in-a-lifetime change in consumer behavior. It also plans to explore foreign markets next year, potentially setting up a fresh revenue stream. Even so, the lack of profitability quarter-to-quarter could rise to the top of investor concerns at any time.
KeyBanc Capital Markets analyst Justin Patterson downgraded Roku from ‘Overweight’ to ‘Sector Weight’ on Thursday, citing valuation concerns after shares have risen more than 50% in less than one month. He insists that “positive fundamentals appear reflected in share price”, along with other catalysts that have lifted the stock nearly 70% since the start of 2020. He also believes the company now “needs new catalysts to outperform”.
Wall Street And Technical Outlook
Wall Street consensus is growing more cautious due to outsized share gains, with a ‘Moderate Buy’ rating based upon 13 ‘Buy’ and 6 ‘Hold’ recommendations. Two analysts recommend that shareholders take profits and close their positions. Price targets currently range from a low of $65 to a street-high $255 while Roku is now trading just $28 below the high target. This lofty placement suggests higher price targets will be needed to sustain the upside.
The stock topped out in the 170s in 2019 and sold off nearly 120 points into the first quarter’s pandemic low at 58.22. It recovered those losses into July and broke out in September, posting strong volume that confirmed the breakout. Price action hit an all-time high at 239.14 earlier this week, ahead of two down days that haven’t affected highly-bullish technical readings. As a result, buying a pullback between 175 and the psychological 200 level looks like a smart choice.
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