Roku (NASDAQ:ROKU) stock reports its earnings on Wednesday, Aug. 7 after the closing bell. In recent quarters, Roku has become one of the highlights of earnings season due to the extreme reactions the stock tends to bring.
However, this also means traders might have to redefine “disappointment” for Roku stock. With an equity prone to huge moves after earnings, it is the lack of a reaction that would hurt traders more than an extreme drop.
A Likely Earnings Beat and Reaction in ROKU Stock
Wall Street foresees a consensus 21 cents per share loss in Roku’s second quarter. The company broke even in the same quarter last year. They also predict revenues of $224.2 million. That would represent a 43% increase from the second quarter of 2018 when the company brought in $156.81 million.
Traders can (almost) count on two things when the company reports earnings. For one, Roku stock has exceeded earnings and revenue estimates in every report since its September 2017 IPO. I would not expect that to change this time.
Moreover, ROKU almost always reacts strongly to these reports. The previous report led to a 28.1% one-day increase in the stock price. In February, the Roku stock price rose by 25.2% after earnings. November’s third-quarter report brought a 22.3% drop in the stock. Those reactions will not go on forever. Still, it should not surprise traders to see another 20%-plus change in the stock price.
Where Will ROKU Stock Go?
I would not necessarily count on a higher move in the short term. Our own Nicolas Chahine described Roku stock as “over the top and headed higher.” I agree with that in the long-term.
Roku continues to maintain its lead over competitors. In the market share for streaming, Roku stock `remains well ahead of Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT), the second and third-leading streaming platforms respectively.
Also, given the stock’s reaction to earnings in the last two quarters, I cannot discount the possibility of yet another spike higher following earnings.
However, InvestorPlace feature writer James Brumley’s warning that investors should take profits could also prove correct. For one, ROKU trades at about 14 times sales and more than 30 times its book value. Yes, equities such as Roku stock can defy gravity for years. However, the overall market has suffered in recent trading sessions, so traders should not rule out the possibility of a massive selloff.
Investors should note that it once held an advantage over Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) as a neutral platform. Due to the launch of the Roku channel, that neutrality has ended. Admittedly, it has thrived by launching an advertising and streaming ecosystem. However, it remains unclear whether abandoning its neutrality will help the company.
Should I Buy ROKU Stock Before Earnings?
When asking whether to buy or to sell Roku stock before earnings, I would say no, except as a speculative position on both sides. What I mean by that is, ROKU is one of the few stocks where one might profit from a straddle, or buying both a call and a put option. For most equities, the cost of options right before earnings is such that most traders will lose money on such a trading strategy.
The Roku stock price stands at just over $100 per share as of the time of this writing. A call option with a $100 strike price expiring on Aug. 9 (just after earnings) sells for $8.90. An equivalent put option trades at $8.17. This means that the stock will have to move more than 17% (not including fees) for a straddle bet to earn a profit.
I still see that as a risky gambit much too expensive to recommend. However, investors should note that most of the one-day moves following earnings have exceeded 17%.
In the long run, I see Roku stock as an equity headed much higher. However, given the overall market conditions, I foresee pain in the near term, and I would not buy at this time.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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