Short selling data can be a very useful risk management tool. Short sellers tend to be sophisticated, high-conviction traders. If they’re shorting a stock, there’s usually a good reason they are doing so.
In this report, we are going to analyze the short selling data on Roku Inc (ROKU:US). Roku operates a television streaming platform. Its streaming devices, which provide access to services such as Netflix, Disney, and Apple TV, are used by millions of consumers across the world. The company is listed on the Nasdaq Global Select Market and currently has a market capitalization of $22.5 million.
Roku Inc: Short Selling Activity
Looking at the short selling data on Roku we see a major red flag and that is that the number of shares on loan has risen significantly recently.
At the end of September, the number of shares on loan here was 1.86 million. However, today, the number of shares on loan is 5.02 million. That represents an increase of approximately 170% in just over three-and-a-half months. This sharp rise is a little concerning, in our view, as it indicates that short sellers are ramping up their downside bets. The utilization rate has also climbed significantly over the period, from 0.97% to 6.57%.
It’s worth noting here that 5.02 million shares only represents about 4.27% of the free float. So, short interest is not so high on a relative basis. There are plenty of growth stocks with much higher levels of short interest. However, it’s the trend that often matters. And the trend here doesn’t look good.
While Roku’s share price has fallen significantly over the last six months, the valuation remains high.
For 2021, analysts expect the group to post revenue and earnings per share of $2.8 billion and $1.58 respectively. That puts the stock on a price-to-sales ratio of 8.0 and a price to-earnings ratio of around 106. These high numbers could be an issue for the stock given that the Fed is tapering and investors are now focusing more on valuation.
It’s worth noting that broker sentiment towards Roku has turned a little bearish recently. On January 5, for example, analysts at UBS downgraded the stock from ‘buy’ to ‘sell’ – a double downgrade. On the same day, analysts at Atlantic Equities started coverage with an ‘underweight’ rating and a $136 target price – nearly 20% below the current share price.
The rising short interest here suggests that short sellers expect to see further downside. In light of this short selling data, we think caution is warranted towards the stock right now.