Shares of freshly public streaming platform Roku (ROKU 5.41%) have started off the new year with a whimper. Roku closed out trading today down 10%, and shares have already lost nearly a quarter of their value year to date. To better understand why the stock continues to fall in the absence of negative news, it's worth acknowledging why it ran up so quickly in the first place.

It has a lot to do with short interest.

Search interface for Roku OS 8

Image source: Roku.

Shorts matter

Shortly after Roku's first public earnings release, I wondered if a short squeeze could have contributed to its massive pop. At the time, short analytics specialists S3 Partners said that short covering did not contribute to the 130% gain that Roku shares enjoyed in just three days. Instead, it was bullish long investors all clamoring to get a piece of the streaming platform, after an admittedly strong earnings release.

The official short interest figures reported by the exchange support this: Short interest actually increased in the first half of November from 4.8 million shares to 7.2 million shares. If anything, the jump only attracted more short investors that probably thought Roku's valuation was looking a bit lofty.

Short covering does appear to have contributed to Roku's jump in early December, as short interest declined from 7.7 million to 5.9 million.

ROKU Chart

ROKU data by YCharts.

Roku short interest has been rather volatile in the brief time since the company went public, which only contributes to stock-price volatility as investors try to figure out how to value Roku. That task isn't made any easier by the fact that Roku lacks comparable pure-play peers in video streaming.

Is Roku really the top streaming platform?

In an interview with CNBC earlier this month at CES, Roku CEO Anthony Wood repeatedly proclaimed that Roku is "leading streaming platform for TV in the U.S. by a large margin," thanks in part to "the best content selection."

However, that's a really bizarre assertion that's hard to defend. That title should easily go to Netflix (NFLX 4.17%), which had nearly 53 million total memberships in the U.S. at the end of the third quarter. In contrast, Roku had 16.7 million active accounts at the end of the third quarter. Furthermore, a full third of hours streamed -- almost 1.3 billion out of the 3.8 billion hours streamed in the third quarter -- on Roku is people watching Netflix anyway, further underscoring Netflix's dominance. Netflix's prevalence on Roku is even one of the primary reasons why Roku was downgraded by Morgan Stanley earlier this month.

It seems that investors may be realizing that Roku won't be able to live up to its valuation. Roku and Netflix both trade right around nine times sales, but the two companies' business models are not comparable, undermining the idea that they should fetch similar valuation multiples. Netflix has built its ubiquitous ad-free service on both third-party licensed content as well as a growing catalog of originals, earning a monthly subscription fee in the process. Roku focuses exclusively on third-party content that is increasingly ad-supported for its platform business, while it sells hardware at razor-thin margins.

Fundamentally, Roku is making progress, but shares can still be overvalued.