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Buy Roku on Streaming Growth with Its Stock Up 100% in 2019?

Benjamin Rains

Shares of Roku ROKU have skyrocketed over 100% this year, despite Wednesday’s selloff, as the streaming TV firm races back toward its fall 2018 highs. The company is coming off stronger-than-projected fourth quarter financial results and its top-line growth outlook appears impressive, especially within the context of the larger expansion of streaming entertainment.

Recent News

Roku stock plummeted nearly 15% on Wednesday after Loop Capital analysts dropped the streaming TV firm from a “hold” to a “sell.” The firm cited the company’s current valuation picture as a significant reason for the downgrade.

Meanwhile, Macquarie actually upped its Roku price target Wednesday from $57 to $66 per share. This did, however, mark a roughly 7% downturn from the stock’s closing price on Tuesday of $70.72. In a similar fashion, SunTrust Robinson lifted its price target from $42 to $63 a share. But the new price target once against represented a downturn from Roku’s price at the time.

But that was Wednesday. On Thursday, Needham analyst Laura Martin reiterated her “buy” rating for Roku shares. Maybe importantly, the analyst raised her price target from $65 a share to $85, citing straight forward reasons such as overall streaming growth. The new price represents over 37% upside to Thursday’s closing price.   

“Investors that own Netflix or believe in the U.S. secular trend toward [streaming television] should own Roku because it is valued at a steep discount to Netflix despite comparable growth credentials, a better margin profile, and lower content risk,” Martin wrote in a note to clients. “Any new [streaming] channels that are launched...help Roku because its platform is 100% an aggregator.”

Shares of Roku closed regular trading Thursday up 1.78% at $61.82 a share. Yet, investors can see that Roku stock still rests below its 52-week high despite its 102% surge to start the year. Of course, we can also see that the streaming company’s stock price has been volatile since Roku went public in the fall of 2017.

 

 

Quick Overview

For the full-year 2018, Roku’s revenue surged 45% and reached $742.5 million, with gross profit up 66% to $332.1 million. The firm also added 7.8 million, or 40% more active accounts last year to hit 27.1 million. On top of that, Roku’s full-year streaming hours jumped by 62%, or 9.2 billion to 24.0 billion hours.

Roku sells devices that allow customers to watch streaming services such as Netflix NFLX, Hulu, and Amazon Prime AMZN all in one place. The Los Gatos, California-based company currently boasts a larger market share than rivals like Apple TV AAPL, Amazon Fire TV, and Google’s GOOGL Chromecast, according to eMarketer. In fact, the company said that one in four smart TVs sold in the U.S. in 2018 were Roku TVs.

Furthermore, the firm’s newer Roku Channel allows users to watch free streaming movies and TV shows. The company sells advertising on the Roku Channel and has a marketplace that allows marketers to buy targeted ads. Roku is also likely to benefit from the entry of Disney DIS, AT&T T, Apple, NBCUniversal CMCSA, and others, into the streaming TV market over the next year.

Roku is also in the early stages of its international expansion. The company said last quarter that it expects to see its investments start to pay off in 2020. Global expansion is key because Roku has said that active account growth will be one of the most significant long-term drivers of profit and loss.

Outlook & Earnings Trends

Looking ahead, Roku’s first-quarter revenue is projected to surge nearly 39% to hit $189.40 million, based on our current Zacks Consensus Estimate. This would fall short of Q4’s 46% top-line expansion, but it is worth pointing out that the company blew by our revenue estimate by 6% last quarter. Overall, Roku’s fiscal 2019 revenue is projected to jump 37.4% to $1.02 billion.

At the bottom end of the income statement, we can see that the company’s outlook appears brutal. Yet, Wall Street and many investors might not care much about Roku’s earnings as it spends more heavily on expansion.

 

 

Bottom Line

Roku is a Zacks Rank #3 (Hold) at the moment and sports an “A” grade for Growth and a “B” for Momentum in our Style Scores system. In the end, investors need to ask themselves if they see Roku stock fading just as the streaming TV wars start to truly heat up.

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