Roku share price retreats from all-time high; any upside left?

The streaming devices company reached an all-time high of 196.86 on 6 September, following a spectacular rise of 46.5% through August.

Roku’s [ROKU] recent bump was a result of the launch of a new smart speaker that doubles up as a Roku player. The $180 device will look to enhance viewers’ audio experience whole also allowing users to stream its app services such as Netflix [NFLX] to their TV.

News of the new launch received positive sentiment from analysts, with D.A. Davidson raising its price target to $185 from $135. Shares gained a further 6.2% following the positive note.

This is just one of the many pops the company has had in 2019, however. Shares have been performing at an incredible rate, gaining 353.72% through 2019 – so, despite a 12% loss since the 6 September high, is this rapid growth sustainable?

Opportunity for growth

Roku’s strength is that it benefits from the rapid growth in the TV streaming market, but, as the firm doesn’t make content itself, it escapes the huge production costs many of its competitors face. Its many products, including set-top boxes and dongles, allow viewers access to streamers such as Netflix and Amazon on their smart TVs.

The streaming devices company is a leader in the space, outpacing the likes of Amazon [AMZN] and Google [GOOGL] – which offer their own streaming devices. In the first quarter of 2019, the company held over 30% of the market, outdoing all of its competitors. And with Disney+ [DIS] and Apple TV+ [AAPL] coming into fold this autumn, and AT&T [T] and Comcast [CCZ] also launching services in 2020, it seems this industry is expanding, providing further opportunity for the tech company.

William Blair analyst Ralph Schackart said in August that he expects Roku to grow faster than Netflix did during its growth phase. Speaking to CNBC, Schackart said he expects Roku’s market capitalisation to nearly triple by 2025, growing from its present $18bn to more than $40bn.

Recent earnings

Roku’s Q2 earnings emphasise its growth prospects. On 7 August, the company reported a revenue rise of 59% year-on-year at $250m. Its gross profit rose 47% year-on-year to $114.2m, while total number of accounts climbed by 39% to 30.5m.

The better-than-expected results led the company to raise its 2019 revenue guidance by 4.3% to $1.085bn.

Many analysts have raised their price targets for the company as a result of the positive earnings. Needham analysts Laura Martin and Dan Medina raised Roku’s price target from $120 to $150 in August, as they expect its user base to reach 80m and gain a large share of the US television market.

Roku share price vitals, Yahoo Finance, 17 September 2019

The analysts view

Roku does however face some challenges: the 13% drop was widely caused by the announcement that Apple TV+ was launching at the low price of just $4.99 per month, with investors and analysts believing that this will help Apple devices, as well as its streaming service, take a large chunk of the market.

InvestorPlace’s Will Healy meanwhile argues that the high share price could mean Roku is overvalued and at risk of plunging.

“Roku has become unpredictable at current levels. I still expect the company to dominate the industry it created. I also believe that it will achieve new record highs long term. It remains very possible that those increases will even continue shorter term,” he writes.

“However, such valuations have started to push Roku into bubble territory. Once it falls significantly, it can take years, or sometimes decades, to recover.”

Nearly 8.8m of Roku’s shares sold short as of mid-August, according to Motley Fool.

“Roku has become unpredictable at current levels. I still expect the company to dominate the industry it created. I also believe that it will achieve new record highs long term. It remains very possible that those increases will even continue shorter term” - InvestorPlace’s Will Healy

Many analysts, however, maintain a bullish view on the stock. SunTrust’s Matthew Thornton, who boosted the stock’s price target from $63 to $160, admits he was wrong to stay on the sidelines for so long.

Of 16 analysts tracked by CNN, 10 have a ‘buy’ rating on the stock, five rate it ‘hold’ and just one ‘sell’.