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Roku Stock Needs a Recession

Josh Enomoto

I was only temporarily right about over-the-top streaming device manufacturer Roku (NASDAQ:ROKU). Back near mid-July, I had reservations about the ROKU stock price. It had more than tripled in market value since January’s opening volley. Naturally, I felt that a healthy correction was in order.

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Shortly after I wrote my cautionary tale, the ROKU stock price cooled like clockwork. At one point earlier this month, shares closed below the psychologically important $100 level. Although I was right on paper, I must admit I was wrong on the reason why.

Last month, I had stressed that ROKU was fundamentally stretched. Clearly, extreme enthusiasm had taken over Roku stock. In my view, the company deserved a premium valuation, but not that rich.

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But when shares of the OTT streaming device maker finally corrected, it was more likely due to broader market weakness from the U.S.-China trade war. In other words, Roku stock declined in sympathy with everyone else. Later, the underlying company released its earnings report for the second quarter, and shares were back onto the races.

By most accounts, the OTT provider delivered stunning results. For one thing, the company brought home 30.5 million subscribers overall, representing nearly 39% growth from the year-ago quarter. That was also the first time the company breached the 30 million barrier, a nice excuse to pump up the ROKU stock price.

Further, the device and smart-TV maker rang up $250.1 million in revenue, obliterating estimates calling for $224.2 million.

Now, I could probably nitpick something, like year-over-year subscription growth being in a downtrend since Q3 2017. But why bother when we’re headed toward a recession?

ROKU Offers a Compelling Recession-Proof Argument

Let me back up for a second. I’m not suggesting that a recession is guaranteed. Perhaps, President Donald Trump’s administration has a secret formula that could substantively improve the economy.

However, I base my pensiveness on the yield curve inversion. For multiple times this month, the yield on shorter-dated U.S. Department of Treasury bonds have jumped past yields of longer-dated Treasuries. Stated differently, investors are receiving less reward for taking on more time-based risks.

Truly, this is a nonsensical dynamic, and it worries me on many levels. Logically, the equity markets may absorb some volatility. If anything, they will do so out of sheer uncertainty.

But as a contrarian, I think Roku stock suddenly looks very interesting. Don’t get me wrong, it was probably always interesting. But ROKU is one of the few growth stocks that might offer some safe haven in a downturn.

Why? I’m banking on the consistency of human psychology. A decade ago during the Great Recession, the box office performed surprisingly well. Hollywood offered escapism at a cheap price.

It was the same story back about 90 years ago. One of the most enduring images of the Great Depression is bankers jumping from tall buildings. But those who decided to tough it out had some help from the then-burgeoning movie industry. It brought a smile to a desperately hurting nation.

While we may not suffer such a severe trauma, a downturn will certainly necessitate some downtime. As a low-cost distraction, nothing beats Roku’s OTT streaming products and services.

As you know, the company’s flagship products are their streaming devices. Offering a wide range of performance specs, you pay only $25 for the cheapest. And unless you decide to fork over for premium content like Netflix (NASDAQ:NFLX), that’s all you’ll pay.

How to Play Roku Stock

Still, despite Roku’s potential resilience during a recession, I wouldn’t go too crazy. The reason is that we should all respect the tape. Again, with the yield curve inversion, the major indices risk significant volatility in the future. In that context all names, irrespective of their individual strengths, face some threat.

Therefore, I’m bullish on Roku stock, but not necessarily at this price. I’d like to see at least one healthy correction before considering shares. But when that time comes, the present environment is supportive of the OTT device maker. It provides a relevant service at a price that you just can’t beat.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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