Roku on the Rocks: Has the US Streaming Giant Entered ‘Overbought’ Territory?

Roku has been one of the most impressive stocks of 2023, but has it finally become too bloated for its own good on Wall Street?

It’s difficult to overlook Roku’s (NASDAQ: ROKU) performance in recent months. Despite a post-pandemic decline in share value, the stock has still outperformed the market by 8.64% over the past five years, generating an average annual return of 22.13% in the process.

At a market capitalization just shy of $13 billion at the time of writing, Roku is a streaming service that has room to grow.

Although Roku grew 105.36% in 2023, the stock still sits more than 80% adrift from its July 2021 peak share price.

This places the stock in tricky territory for investors who may be torn between Roku’s former glories and its recent Wall Street rally.

The challenge of pricing Roku stock has been made more difficult by the company’s Q3 earnings in 2023, which highlighted substantial net losses that far exceeded the year prior but also featured a 20% increase in revenue year-over-year.

Such a seismic increase in revenue is down to Roku’s introduction of branded TVs and positive volumes of content distribution and video advertising.

Has Roku Become Overbought?

While Roku’s Q3 earnings report drew cautious optimism in the stock, analysts are becoming increasingly wary of the streaming firm’s rapid growth throughout 2023, indicating that a 105% rise in value is unsustainable.

In December, a team of MoffettNathanson analysts led by Michael Nathanson opted to downgrade Roku’s stock from ‘Neutral’ to ‘Sell’, lowering their earnings estimates for 2024 in the process but upgrading their target price to $66 from $64.

Maxim Manturov, head of investment research at Freedom Finance Europe, echoed the sentiment that Roku’s stock had become too heavy in recent months.

“Roku's stock price has sharply risen in recent months, reaching a technically "overbought" zone,” Manturov explained. “The growth of Roku is slowing, and it faces intensified competition from major streaming giants like Amazon and Netflix.”

December also saw Seaport Research Partners analyst David Joyce downgrade Roku to a ‘Sell’ rating with a price target of $75 per share, citing intense competition among streaming giants like Netflix and Disney+ as well as a widespread decline in media spending as a significant challenge for the stock.

"We're concerned that their ad growth right now seems to be lagging that of the digital video industry,” said Joyce in a recent interview with Yahoo Finance Live.

“They also rely on media and advertisements which has been delayed because of the writers and actors strike earlier this year. The rest of the digital video ad market should be growing in the 12% or 13% range, so on the margin it seems like their share is slipping."

With streaming services becoming a disruptive force in the world of entertainment, analysts appear concerned about Roku’s credentials as a penetrative market presence. But could this offer a silver lining for a stock that’s enjoyed significant growth in recent months?

Room for Market Growth?

While it’s certainly difficult to see Roku competing directly against the likes of Netflix and Amazon, it’s worth noting that the firm’s streaming service, the Roku Channel, recorded a surge in streaming hours of more than 50% in Q3 2023 in comparison to the same period in 2022.

September saw the Roku Channel command a 3% market share of all TV streaming, which puts it in the same ballpark as the likes of Paramount+, Peacock, and Max.

With this in mind, it’s worth looking at how big Roku can become. With a market capitalization of over $200 billion, Netflix is 10 times the size of Roku and serves as a reminder of just how large the video streaming market is becoming.

In addition to this, Roku is a leader in its own right when it comes to user experience platforms for streaming and media services.

As traditional television gives way to new technological innovations, Roku could still emerge as a leading option in steering the streaming revolution across households throughout the US.

Roku is also a strong player in the world of digital advertising.

Although this sector is struggling amid economic headwinds and a loss of consumer spending power, it’s likely to come back stronger than ever, with forecasts suggesting growth from a market value of $627 billion in 2023 to $836 billion by 2026.

In upholding its position as a key force in digital advertising, Roku could be in line to capture greater levels of growth during this period.

Sell or Hold?

One key concern surrounding Roku stock is the fact that the firm is continuing to lose money on an operating basis owing to increasing operational costs. With expenses growing by between 30% and 40% in the last quarter, Roku could struggle significantly if weaker consumer spending continues to scare off advertisers and customers alike.

However, Roku was quick to acknowledge a slowdown in expense growth would be required to regain stability in 2024, and this could be an indication of a more sustainable long-term hold for investors.

While there’s no getting away from the challenges ahead for Roku in a congested streaming market, there’s no reason why the stock can’t ultimately return to its 2021 peaks when skies clear and the company recaptures some momentum on the path to profitability.