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Roku: Covid-19 to Impact Ad Revenue, Top Analyst Reduces Estimates

support@smarteranalyst.com (Ben Mahaney)

Bear markets are usually bad news for growth stocks. As sentiment in the market changes, these hotshots often tend to crash harder. Roku (ROKU) is a good case in point. Following a massive run up in 2019, the stock shed 34% of its share price year-to-date. In mid-March, the stock was down as much as 55%, so if you sold there, you sold at the bottom.

The severe drop is a tad surprising, as during these stay-at-home times, Roku should be one of the few names to reap the rewards of extra engagement on its platform. However, most companies have suffered from the impact of COVID-19, and Roku hasn’t been spared.

The beating is acknowledged at investment firm Oppenheimer, where analyst Jason Helfstein has made some adjustments to his Roku model. The Outperform rating remains, but along with revised estimates, Helfstein lowered his price target from $165 to $110. Yet, investors can expect returns in the shape of a 25%, should the target be met over the next 12 months. (To watch Helfstein’s track record, click here)

The slashing of ad budgets across the board will hit Roku the hardest this month, say Helfstein. The analyst forecasts 2Q ad Platform revenue will be up by 18% year-over-year, instead of the previous call for 62% growth. The dampened advertising climate means the benefits expected from the recent acquisition of demand-side platform Dataxu, won’t be felt until later in the year.

Nevertheless, despite the severe macro headwinds of the first quarter, there were a number of positives. Helfstein estimates that on some services, AVOD viewers increased by more than 50%, along with streaming hours increasing by 22% year-over-year. And despite the current climate, the 5-star analyst believes Roku is “well positioned to gain long-term share of viewing and SVOD activations.”

Helfstein concluded, “Our checks suggest FY20 OTT advertising growth could be negatively impacted by 20%, with April and May being the most impacted. Per retail checks, we see potential upside to active account net adds, and we forecast strong streaming hour growth given shelter in place mandates. Though we see upside to KPIs, we are lowering FY20 Platform revenue 12% (assuming Platform is 65% advertising), now suggesting +41% y/y vs. +60% previously, resulting in Platform GP +16% y/y vs. +49% prior.”

What does the rest of the Street make of Roku’s prospects? 5 Buys, 3 Holds and 2 Sell ratings coalesce into a Moderate Buy consensus rating. The average price target is $131.10, and suggests possible upside of nearly 50%. (See Roku stock analysis on TipRanks)

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