The Wild Life
Sittin' home by yourself with the TV on
Ya know ya got nothin' better to do
And then all of the sudden
Get a feelin' inside
There's a whole party waiting for you.
- Mark Slaughter, Dana Strum (Slaughter) 1992
Is there a more fun stock to trade than Roku (ROKU) ? If there is, I don't know one. Maybe, I should clarify as I have traded options in this name far more than I have traded equity. Simply said, these shares are volatile, and while volatility brings with it danger, the danger is what brings with it, opportunity. Opportunity, folks is why we rise while our families sleep, and why those families are already asleep when we pack it in for the night. So it is, that in a world full of hunters and gatherers, it is we, the merry band of the few, who are the hunters. Die hard the hunter.
Go back to early November. ROKU reports EPS (no adjustments, the real thing) of -$0.22 for the firm's third quarter, on revenue of $260.93 million. Both numbers are beats of industry consensus. The sales numbers was good for annual growth greater than 50% for a third consecutive season. The net earnings loss, however also presents as the third season in a row that came with a minus sign attached, and the worst one at that in two years.
The shares had been in rally mode but sold off hard in response, only to begin their ascent anew. Why? The underlying stats remain impressive, Active accounts grew 36%, streaming hours exploded 68%, average revenue per user ramped 30% higher. In fact,the firm increased guidance coming out of the quarter. The firm pushed the full year outlook up to $1.1 billion at the mid-point, which would be an increase of 49% over the year prior. This move was up from prior guidance of 46% growth, and brought the firm's expectations in line with Wall Street's. The firm also increased guidance for gross profit to $492 million from $485 million.
So what's the big attraction to a business like Roku's? Plain and simple, a fair number of consumers actually enjoy the convenience of the cable box. Even cord cutters. Those active accounts at Roku totaled 32.3 million as of the end of last quarter. This is out of the 86.2 million or so streaming players that Roku has sold in the United States. The competition for the "streaming box" is fierce. Amazon (AMZN) has sold 64.6 million Fire TV devices in this country, while Apple (AAPL) has sold 24.6 million Apple TVs. This makes Roku the industry leader. Why do the bigger firms chase this market? That's easy. Advertising has never been a bigger deal than it is now, as consumers are literally one click, or spoken word away from making a purchase at all times.
Just how big is the addressable market for streaming entertainment? Is there a roof? As traditional cable television continues to see erosion at the base, the number of serious entrants to the streaming arena only grows. I will use myself for an example. I have embraced the streaming universe. My spouse still prefers cable. We are divided household. I already subscribe to Disney (DIS) Plus, ESPN Plus, Hulu (they sure made it easy with the bundle), and Netflix (NFLX) . I have given serious consideration to what Apple offers, as well as the CBS All Access (VIAC) as men my age tend to enjoy anything Star Trek. One of my sons subscribes to YouTube Red (GOOGL) .
In the family room, we have an Amazon Fire device that aggregate these offerings in a presentable fashion, though when I do have time for such entertainment, I tend to use the main monitor attached to my office PC. The family though, does make use of that centralization that the Fire TV offers. The a-la-carte space will only grow more crowded in 2020 as Comcast (CMCSA) and HBO Max (T) enter the fray.
Think You Know?
That's good, because the analyst community, even at the top has been confused by this name. December 2nd... Benjamin Swinburne (5 stars) of Morgan Stanley downgraded ROKU to Underweight on valuation, while "raising" his price target from $100 to $110. One day later, Laura Martin (also 5 stars) of Needham reaffirms her Buy rating, and raised her target from $150 to $200. Could be that they're both right. Since mid-September, ROKU has traded as high as $176, and as low as $98 a share. Truth be told, the shares trade at a negative forward looking PE ratio, and the firm still runs on negative margins. Yet, operating cash flow is positive and there is twice as much cash on the balance sheet than there is total debt. Roku appears to have no problem meeting obligations going forward. That competition though. That's real.
I drew up this cup with handle for you back when the firm reported those Q3 earnings. Obviously the breakout above that $151 pivot was short-lived. What if...
What if we smooth out the right side of the cup, and chalk up the early November post-earnings volatility to noise. I know that's a liberty that I may not be entitled to, but if we do that, the handle now in formation becomes interesting, and the pivot would have to be moved much higher... to $169. In the meantime, the 50 day SMA will either present as resistance, turning this piece into literary folly, or act as a trebuchet. When will we know? Roku does not report fourth quarter until mid-February, even with a new CFO, which appears to be not that much of an issue, there will be plenty of wiggle room for a growth stock (1.5 beta) in what will be a volatile environment.
Trade Idea (minimal lots)
- Purchase 100 shares of ROKU at or close to the last sale of $134.40.
- Purchase one ROKU January 24th $125 put for roughly $6.65.
- Sell (write) one ROKU January 24th $145 call for a rough $6.80.
Notes: The idea here is to get some skin in the game, but to protect oneself to the downside through expiration. In order to limit potential loss, the trader sells the potential for profit above the $145 level by expiration for a dollar total in line with whatever the downside protection will cost. In other words, then trader is trying to bunt just to get on base, while avoiding accidentally hitting into a double play.