Please ensure Javascript is enabled for purposes of website accessibility

Investors Are Betting Big Against Roku -- Why They're Wrong

By Rick Munarriz - Updated Dec 27, 2017 at 12:23PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The number of shares of Roku sold short has ballooned up to 7.7 million, but the bears have been the ones getting burned.

The number of bears when it comes to Roku (ROKU -5.97%) keeps growing. There were nearly 7.7 million shares of the streaming media pioneer sold short at the end of November, a small number relative to the 97.8 million shares outstanding, but most of those shares are tightly held by insiders. Roku's short interest is a whopping 44% of the public float that stands at just 17.4 million shares. 

It's easy to see why the boobirds feel that betting against Roku stock is the right call. The shares have nearly quadrupled since going public at $14 three months ago, bucking the trend of many of this year's debutantes that have proven mortal. Roku is not currently profitable, and sales of its namesake media players have grown stale. As strong as Roku's first financial report as a public company was -- and it was strong -- is this really a company worth nearly four times what underwriters thought it was worth in late September? We know where the bears stand on the matter, but obviously the market has had other plans for Roku.

A TCL tv running the Roku TV operating system.

Image source: Roku.

Short clips

The easy case for betting against Roku is that the naysayers have been wrong all the way up. Roku shorts have been growing at every passing mid-month interval since its September IPO, and the stock has been moving higher, particularly through November and December with its record number of shorts. 

Settlement Date Short Interest Stock Price
Oct. 13, 2017 4.1 million shares $23.02
Oct. 31, 2017 4.8 million shares $20.38
Nov. 15, 2017 7.2 million shares $39.32
Nov. 30, 2017 7.7 million shares $43.90

Image source: NASDAQ.

The stock's been climbing a wall of worry. Roku has risen for seven consecutive weeks before retreating slightly last week. Momentum is a hard foe to bump up against, but the biggest reason to hold back on joining the 7.7 million -- and growing -- shorted shares is the open-ended potential of Roku's future. 

Roku's hardware sales have been flat this year, but revenue growth is accelerating. Roku's installed base of users is growing. Device sales have been incremental, but with a fifth of all smart televisions rolling out with Roku's operating system, the burden of ambassadorship is shifting. Platform revenue soared 137% in Roku's latest quarter. 

Engagement continues to grow, with usage surpassing user growth. Roku is also milking a lot more money out of its typical viewer. Before you short Roku, consider that active accounts have risen 48% over the past year, and the average revenue per user has soared 37% on top of that. Streaming hours have soared 58%, so it's not as if the 16.7 million users on Roku's platform are going away anytime soon. 

A big reason why Roku has become so popular is that it's platform is service-agnostic. It carries thousands -- yes, thousands -- of streaming services. You're seeing tech giants in this space get territorial while Roku is there waiting with open arms. There isn't a major media company that isn't developing some sort of premium streaming service, and it's fair to say that Roku will be there for its growing user base as they launch. There will be a shakeout among the content providers, but Roku will continue to thrive. 

The pace of Roku's gains are not sustainable. The stock won't nearly quadruple again in the next three months. However, if you're going to bet against the stock without sizing up its open-ended appeal and the reasons for the bullish momentum, you may wind up as scorched as the first three months of short-sellers.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Roku Stock Quote
$89.09 (-5.97%) $-5.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.