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Bulls vs Bears on Roku: Which Side Should Investors Take?

While shares of Roku Inc. (ROKU) have surged a whopping 338% year-to-date, the bears point out that this doesn’t necessary imply smooth sailing for the streaming player company. Despite seeing its fair share of ups and downs, Roku may have just gotten the boost it needed to keep the bulls firmly in their camp. On August 12, Needham's Laura Martin raised its price target from $120 to $150, sending share prices soaring 7%.

“Roku is the dominant internet aggregator for streamed TV & movie content, like YouTube is for user generated content, at about 1/20th the valuation," the five-star analyst according to TipRanks wrote in a note to clients.  

We take a closer look to see who has it right on Roku, the bulls or the bears.

The Bull Case

Some investors originally expressed concern that Roku’s growth would slow after Netflix’s (NFLX) July 17 Q2 earnings release showed a decline in subscriber acquisition.

However, Roku’s business strategy is fundamentally different from Netflix’s. Unlike Netflix and Hulu, which spend more on content as well as charge for subscriptions, Roku’s business model is based on its hardware and platform, which includes advertising and other services.  

This strategy appears to be paying off based on its second quarter earnings release. On August 7, the company reported that quarterly revenue reached $250 million, up 59% year-over-year. Management attributed these gains to the doubling of its monetized video ad impressions year-over-year, with player growth also gaining 24% year-over-year. More good news came when the company raised its full year guidance, saying 2019 revenue will now exceed $1 billion.

Investors now have another reason to be excited when Roku announced it had reached an agreement with Walmart (WMT) to offer new Roku devices under WMT’s Onn brand. The company has also made progress in expanding the content distribution segment of its business through its Roku play, with it expecting even more gains after Disney+, Disney’s (DIS) streaming service, is launched on November 12.

Roku claims the Disney+ launch will give it the advantage it needs to leave its competitors in the dust. "We are excited, to say the least, about the coming services into [over the top], and believe that we are an essential platform for these new services,” said Scott Rosenberg, the head of the company's platform business.

On August 8, Roku received a vote of confidence from Rosenblatt Securities. Mark Zgutowicz, a five-star analyst, upgraded the rating to a Buy and raised the price target from $77 to $134. “The company is essentially out-scaling the unowned content model,” he said. The analyst boasts a 73% success rate and gets an average return of 26% per rating.

Four-star analyst, Kyle Evans, agrees that the streaming company’s strong Q2 performance warranted a ratings boost. On the same day as Zgutowicz, he upgraded the stock to a Buy and raised the price target from $84 to $120. “The quarter benefited from the revaluation of multi-element content distribution agreements (called out by management but not quantified), but we believe Roku's fundamentals remain sound and that its nexus business model will continue to power solid financial results,” the Stephens analyst said.  

The Bear Case

Roku faces steep competition in the streaming player space. Amazon (AMZN), Google (GOOGL) and Apple (AAPL) all offer streaming players that go head to head with Roku’s. However, the real threat comes just from AMZN. The ecommerce giant made significant progress in its efforts to expand its Fire TV player customer base, with it boasting 34 million regular users compared to Roku’s 30.5 million active accounts. According to a Conviva report released on August 7, Roku still leads the race in terms of market share with it controlling 43% of the connected TV space vs Amazon’s 18%.    

There are also concerns regarding the streaming platform’s expensive valuation. Its market cap is over $15 billion, with revenue for full year 2019 expected to be only $1 billion.   

Four-star analyst, Alan Gould, said “The company remains well positioned in the TV ecosystem's shift to streaming. Roku will continue to exceed expectations, particularly as the launch of Disney+ (DIS) draws closer. However, it’s difficult to justify the $13B enterprise value on the stock, or over 10-times next year's platform revenue.” On August 8, the Loop Capital Markets analyst reiterated his Sell rating but raised his price target from $45 to $80, indicating 40% downside.

Five-star analyst, Benjamin Swinburne, agrees that the competition from Amazon and high valuation suggests that now isn’t the time to buy. On August 9, he reiterated his Hold rating and raised the price target from $70 to $100, implying 26% downside. The Morgan Stanley analyst has a 60% success rate and gets an average return of 12% per rating.

The Final Verdict    

The jury is still out on Roku. It has a ‘Moderate Buy’ analyst consensus and a $115 average price target, suggesting 14% downside.

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