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Stop Worrying About Roku Stock’s Valuation

When it comes to growth stocks in general and the growth stocks of  newer or smaller companies in particular, investors can be confounded by a variety of concerns, including high valuations, wondering if they’re too late after a big move higher, and trying to determine when a growth name will become profitable.

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The losses of one growth stock, Roku (NASDAQ:ROKU), are narrowing. Based on the company’s ability to grow its revenue, pare those losses and approach profitability, Roku stock may not be as expensive as it appears at first glance. Importantly, even after more than quadrupling in 2019, it is possible that Roku stock’s market capitalization of around $14.3 billion can increase over the near-term.

As a streaming-entertainment provider, ROKU inevitably draws comparisons to Netflix (NASDAQ:NFLX). Netflix is a story stock in its own right, and those comparisons are apt to get some investors excited about Roku stock. That excitement is justified, but the owners of Roku stock should not become enamored with comparisons between the companies. Rather, the best course of action is to evaluate Roku’s businesses and worry about whether it  is becoming the best version of itself, not the second coming of Netflix.

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Roku’s player and platform segments are the primary drivers of its revenue and of ROKU stock price.

“It derives key revenue from the Player segment which consists of net sales of streaming media players and accessories through retailers and distributors, as well as directly to customers through the company’s website,” according to Morningstar. “Platform segment consists of fees received from advertisers and content publishers, and from licensing the company’s technology and proprietary operating system with TV brands and service operators.”

Banking on Blowouts

Roku’s second-quarter report was a blowout,  as the company reported a loss of 8 cents per share, well below the 21 cent per share loss Wall Street was expecting. That report, delivered last week, sent the ROKU stock price higher by more than 20% in one trading day after the shares had surged 14% in July.

That report had analysts waxing bullish on  ROKU, taking the average price target on Roku stock to $111 from $88 in just a day. But Roku stock closed just over $131 on Friday, indicating that the average price target may need to increase further.

“While Amazon(NASDAQ:AMZN) will always be an imminent threat, Roku TV is a runaway train,” said Rosenblatt Securities Mark Zgutowicz, who has a $134 price target on Roku stock. “ROKU’s brand and audience reach is essentially ‘out-scaling’ the unowned content model.”

The price target increases are starting to trickle in. On Aug. 12, Needham analyst Laura Martin boosted her forecast on Roku stock to $150 from $120, implying a gain of about 15% from the  current ROKU stock price.

“The vast majority of streaming services to date have chosen to either charge a subscription fee OR give consumers free programming, supported by advertising,” said Martin. “”Roku’s focus is on free content, supported by ad dollars. Netflix is competing for subscription dollars.”

The Bottom Line: Analysts May Be Too Conservative on Roku Stock

The video-streaming industry has a lot of favorable tailwinds, many of which ROKU can seize as it widens its platform, particularly as new streaming-content providers partner with the company. Non-cyclical streaming trends coupled with robust top-line growth and compelling customer engagement data indicate the valuation of Roku stock may ultimately prove too conservative.

Roku’s business model as an aggregator, rather than a purveyor, of content could not only prove cost-efficient relative to Netflix, but vital, as the likes of Walt Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) launch streaming offerings.

Trading at nearly 16 times Roku’s sales, Roku stock isn’t a value play, but its multiple is likely to prove warranted, given the company’s enviable market niche and its management’s  history of solid execution.

As of this writing, Todd Shriber doesn’t own any of the aforementioned securities.

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