With Roku (ROKU) stock up more than 200% since the start of the year, is it still smart to buy?
The company has been on a tear, with continued strong earnings propelling its stock up. Since this time last year, the number of users on the platform has grown 40%, to 29 million, while revenue per user has increased 27% in the same time. But its stock isn’t up so much solely because of its metrics — last year, shares plunged 62% from its peak, making it ripe for comeback.
Yet, analyst Michael Pachter of Wedbush doesn’t see shares increasing much now, as he maintains his Neutral rating on the stock and $105 price target, up from $65. (To watch Pachter's track record, click here)
Pachter is encouraged that Roku is so far effectively competing against the behemoths in tech – Amazon, Apple, and Google – with investors believing that it has an opportunity to be a global leader in streaming platforms. The analyst says the company will likely license its platform on TVs with existing international distribution, which will drive international expansion without requiring heavy investment in international distribution.
But as the company expands internationally, it must also continue to expand its Roku Channel for the international markets. As a result, Pachter says the company “must spend heavily on R&D to accommodate various international standards and to collect inexpensive local content to enhance The Roku Channel (“TRC”) offerings, along with expanding existing licenses to international.” Essentially, while the US market is vast, it is different than foreign markets and Roku must adjust (and spend) as needed.
As Disney and Apple both enter the streaming game later this year, Pachter expects “the expansion of high-quality streaming apps to drive increased cord-cutting and grow the overall pool of active users for the Roku platform.” But as competition increases, users may turn away from TRC and contribute to lower ad revenue. Another possibility is that Roku could “choose to drive TRC viewers by increasing content spend while enhancing TRC features and advertising capabilities, driving expenses higher.” It’s unknown right now which route users/Roku will take, but Pachter nonetheless thinks it “could be years before Roku is able to reach profitability.”
All in all, according to TipRanks analytics, Roku stock has 7 bullish analysts in its corner over the last three months, 3 analysts playing it safe on the sidelines, and 2 bears who see the stock falling. Notably, the 12-month average price target (from a pool of Street-wide expectations) showcase 9% downside for the 'Moderate Buy' rated stock.