Roku Inc (NASDAQ:ROKU) is a TV streaming platform operator with over 27 million active accounts as of the end of 2018. The company held it IPO in September 2017 and is approaching its second birthday as a public company.
Unfortunately, Roku has been a money-losing company for years. Yet, it has a market cap of over $12.3 billion. ROKU stock reached an all-time high of $113.44 a share earlier this week. Yesterday, it closed slightly above $109. But instead of simply extrapolating the past trend into the future, investors should be very careful, especially when a loss-making company trades at such a rich valuation.
Obviously, Roku’s fundamentals and its stock price parted ways long time ago. In order to find out if the stock is finally approaching a point of reversal we will have to use a different approach. The Elliott Wave chart below should make the currently complacent bulls feel quite nervous.
Roku ‘s 4-hour chart reveals the stock’s entire surge from $26.30 in December 2018. Typically, a 314% price rally in seven months should be enough to ring the bubble alarm in your head. On top of that, it has shaped up to be a perfect five-wave impulse, labeled 1-2-3-4-5.
According to the Wave principle, a three-wave correction in the opposite direction follows every impulse. This means ROKU stock can soon be expected to head south for a notable retracement. The support area near $70 a share looks like reasonable bearish target.
In addition to the wave structure, the RSI indicator reveals a bearish divergence between wave 3 and 5. Roku has been a wonder stock in 2019 so far, but if this analysis is correct it is also a bubble stock that is about to pop. Careless bulls may end up with a ~35% loss from current levels.