Roku Surges to 3-Month High After Raising Guidance

Entertainment upstart Roku, Inc. (ROKU) is trading more than 13% higher on Friday morning after beating profit and revenue estimates in Thursday evening's fourth quarter release. The company expects to report in-line first quarter revenues, but Roku raised fiscal year 2019 guidance, attracting healthy buying interest that continued after the opening bell. The all-time high is out of reach at this time, nearly 20 points higher than the current price.

The rally settled at resistance a few minutes after the open, and not everyone is pleased by the quarterly results or full-year guidance. Specifically, Wedbush Securities downgraded Roku stock from Outperform to Neutral during the pre-market session and lowered its price target to $55. Clearly, the Wedbush analyst believes that Roku shares are fully valued in the mid-$50s given the current trajectory of 2019 revenues.

Folks with cable subscriptions or Fire TV boxes may be unfamiliar with Roku's streaming hardware, but Roku's products are quickly rising to superstar status, and the company is expecting more than $1 billion in 2019 revenues. Roku was founded in 2008 by a former Netflix, Inc. (NFLX) vice president who went out on his own after the streaming giant decided not to build hardware. The company has grown by leaps and bounds since that time, attracting a loyal customer base trying to avoid giant cable and satellite ecosystems as well as Amazon.com, Inc.'s (AMZN) monster-sized footprint.

ROKU Weekly Chart (2017 – 2019)

The company came public at $15.78 in September 2017 and rallied more than seven points in its opening session. The uptick reversed near $30 on the following day and entered a steady pullback that found support near $18.30 in October. It tested that price level a month later and turned sharply higher in a five-point gap that followed the first quarterly report since the initial public offering.

The stock added another 11 points into December, topped out at $58.80 and rolled into a trading range, with support in the upper $20s, which is near the midpoint of the November 2017 rally bar. It turned higher at that level in April 2018 and added points at a steady pace, completing a round trip into the 2017 high in August. A breakout about two weeks later hit an all-time high at $77.57 in October, ahead of a downturn that failed the breakout just three weeks later.

Sellers took control into the second half of December, dumping the stock to a 13-month low in the mid-$20s, while the recovery wave into February 2019 crossed the 50% sell-off retracement before the quarterly confessional. The weekly stochastics oscillator reached the overbought level in January but hasn't crossed over, indicating strong trending action. Even so, strong resistance between $58 and $59 is likely to limit gains into the foreseeable future.

ROKU Daily Chart (2017 – 2019)

A Fibonacci grid stretched across the decline that started in October 2018 places the .618 retracement at the failed breakout and December 2017 high. The stock reached this resistance level about six minutes after the opening bell, raising the odds that the rally will stall quickly. More importantly, a reversal starting at this level that reaches the red trendline of lower lows would complete a bearish head and shoulders topping pattern.

Fortunately for bulls, the on-balance volume (OBV) accumulation-distribution indicator isn't confirming this bearish price structure, hitting an all-time high in September and bouncing back into that level ahead of the news. A positive Friday close is likely to trigger new OBV highs, predicting a more favorable outcome in coming weeks. Even so, market players should keep this pattern conflict in mind when making buying and selling decisions.

The Bottom Line

Roku stock is trading sharply higher on Friday after the company raised 2019 guidance, but the buying spike could yield a short-term climax rather than a sustained uptrend.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.