Last year’s coronavirus selloff dragged Roku to barely above $58 a share. At that low point, the stock was down 67% from its September 2019 high. Fortunately for its shareholders, however, Roku ‘s rebound was even more spectacular. The share price reached an all-time high of $486.72 by February 2021, up 740% in less than twelve months.
But the streaming industry in which Roku operates is extremely competitive. While Netflix remains in the leading position, Disney, Amazon, Hulu and Apple, just to name a few, are all making strides in the space. As a result, most streaming platforms operate at a loss. Roku ‘s revenue is growing rapidly, but its bottom line has been gravitating around zero for years.
Netflix might have some kind of a competitive advantage in terms of scale and Disney – in terms of content. But we fail to see any competitive moat around Roku. So with the stock still down 32% to $330 now, is this a buying opportunity?
Trends move in repetitive patterns, called impulses. Assuming an impulse is really in progress, Roku ‘s surge since its 2017 IPO can be labeled (1)-(2)-(3)-(4) so far. Wave (4) just bounced off the lower line of the trend channel drawn through waves (1) and (3). What is missing is the fifth and final wave.
Roku ‘s Extreme Valuation to Stretch Even Further
Unless a truncation occurs, wave (5) is supposed to exceed the top of wave (3). This means that if the count above is correct we can expect a new record high somewhere north of $500 a share. Once this happens though, two problems would arise.
First, at $500 a share Roku would be valued at over $70 billion or roughly 19 times its expected 2022 revenue. With valuations like these the word ‘bubble’ immediately comes to mind. And second, the Elliott Wave theory states that a three-wave correction follows every impulse.
Instead of celebrating the new high, the bulls should watch out for a notable bearish reversal. Corrections usually erase the entire progress made by the fifth wave. In Roku ‘s case, a ~40% drop to the support area of wave (4) near $300 would make sense. Perhaps even lower.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!