What happened

Shares of Roku (NASDAQ: ROKU) are jumping today, up by 13% as of 11:30 a.m. EST, on continued positive momentum from the company's first public earnings release on Wednesday. Street analysts are becoming increasingly bullish while shorts may potentially be getting squeezed out as well.

So what

Roku has done a good job emphasizing its platform business as the driving narrative for investors, and the results easily supported the growth story. Active accounts and hours streamed put up strong gains, jumping to 16.7 million accounts and 3.8 billion hours, respectively. Needham analyst Laura Martin also boosted her price target on Roku to $28 following the results, according to Barron's. Shares have traded as high as $33.64 today as of this writing.

Image source: Roku.

Martin points out cost efficiencies that brand advertisers can enjoy, as they can "use their existing 30-second TV spots on Roku," while Roku's platform offers more analytics around targeting and measurement than traditional TV.

Now what

There's also a distinct possibility that a short squeeze is currently unfolding. Roku's valuation metrics are admittedly a bit lofty for a hardware company, but the growing significance of the platform business alleviates valuation concerns as that highly profitable business grows. That optimistic valuation has attracted short-sellers, and there were 4.8 million shares held short at the end of October, or nearly 10% of the 18.1 million Class A shares outstanding.

Roku has 79.7 million outstanding Class B shares that have greater voting rights but are held only by insiders and not traded publicly.

In early October, Reuters reported that the cost to borrow Roku shares had jumped from 20% to as high as 65%, citing data from S3 Partners. I just checked with my broker-dealer for current rates, and I was quoted a 20% cost to borrow. Borrowing costs are presented as annualized rates. Strong earnings combined with relatively high short interest and borrowing costs sounds like a recipe for a possible short squeeze.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.



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