What’s an extra 20% when your stock is already up 225% for the year? That’s what Roku (ROKU) investors are thinking right now.
Until Thursday — when ROKU stock surged 20% — shares were on a scorching pace for 2019, up 225% for the year. The streaming giant announced earnings Wednesday evening, and to say investors were pleased is a vast understatement. Specifically, Roku generated $250 million during the quarter, up 59% since last year, while gross profit increased 47% since last year.
But with shares reaching new heights, Wedbush analyst Michael Pachter believes most of that profit upside is priced in, as he maintains his Neutral rating on ROKU stock with $105 price target. (To watch Pachter's track record, click here)
Even though Pachter believes that Roku clearly has tremendous opportunities for revenue growth, as a result of cord cutting and the rise of OTT services, the analyst says “multiple is already stretched,” which is why he remains sidelined on the stock.
One of the biggest factors is Roku profitability. While the company saw gross profit surge, EPS remains at $0.00 — though up from negative territory last year, still not an indication of sustainable profitability. The company offers a less expensive platform and operating system, which, says Pachter, "allowed it to remain price competitive and profitable even while its much larger competitors forego profits for volume sales.”
But the concern comes not from the platform, but from the content. Streaming services are becoming more popular, especially with Apple and Disney entering the segment. But in order to best compete, Roku — through The Roku Channel (TRC) — must continue spending on engaging content. To that end, Pachter expects the company to "drive TRC viewers by spending more on content” which will contribute to higher expenses.
On the positive side, however, the entrance of Disney+ and Apple+ will help “drive increased cord-cutting, and grow the overall pool of active users for the Roku platform,” Pachter says. On top of this, Roku will earn a royalty fee from customers who sign up for the new services through Roku. While on the one hand, streaming services takes ad revenue away from Roku, on the other hand, it helps propel the OTT market, with Roku being a clear leader.
All in all, Roku may be one of the hottest stocks on Wall Street, but that doesn’t mean that Wall Street is completely sold moving forward. TipRanks’ analysis of 11 analyst ratings shows Moderate Buy consensus, with seven analysts recommending Buy, three saying Hold and one advising Sell. Interestingly, the average price target among these analysts stands at 112.92, which implies nearly 10% downside. But this is most likely because the stock surged Thursday, with analysts not updating their targets in time. (See ROKU's price targets and analyst ratings on TipRanks)