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Netflix NFLX posted a blockbuster year in 2020, adding a record 37 million paid subscribers to blow away its average of about 23 million over the last five years. Despite its showing, Netflix stock has lagged far behind the only other true pure-play streaming TV stock, Roku ROKU, which has soared 230% in the last 12 months.
As more people disconnect from legacy media, streaming TV companies are prepared to reap the benefits and Roku might be set to stand out from the pack.
Streaming Market Boom
The streaming revolution that helped propel Netflix stock to one of the best performances of last decade has been accelerated by the pandemic. Roku has said that roughly 33% of U.S. households have cut traditional pay TV already and some projections call for that figure to climb to over 50% by the end of 2024.
Netflix ended 2020 with 204 million global paid subscribers, meanwhile, Disney+ DIS destroyed its own growth outlook since its November 2019 launch. The company initially projected that the platform would hit 60 to 90 million subscriptions by 2024. The entertainment titan had already hit over 85 million by December 2020 and it raised its Disney+ forecast to between 230 to 260 million subscribers by 2024.
Disney’s quick growth comes within a crowded market that includes the biggest tech companies in the world such as Apple AAPL and Amazon AMZN, as well as HBO T, NBC Universal CMCSA, and others. And Roku stands to benefit from streaming TV growth as a whole, no matter which streaming services end up on top of the pile.
Roku, which went public in 2017, sells small devices that plug into TVs that allow users to watch streaming TV content from various services. The company’s tech is also built into smart TVs from different companies. In fact, Roku was the No. 1 smart TV OS sold in the U.S. in 2020, with nearly 40% market share. The company also sells wireless sound systems that compete in a market alongside Sonos SONO.
Along with its devices and streaming TVs, Roku is able to make money from advertising by selling ad space across its marketplace. This allows marketers to buy targeted ads, promote their streaming offering, and more. And it’s able to attract advertisers through its Roku Channel that allows users to watch free, ad-supported streaming movies and TV shows.
Roku also landed in early January the streaming rights to all the short-form shows that the now defunct Quibi created. This could help it add users to the Roku Channel, while increasing its appeal to advertisers. And Roku is slowly working to expand its international business.
The company’s digital ad push was boosted by its 2019 purchase of demand-side ad platform firm Dataxu. Investors should note that advertisers will be clamoring to reach users anywhere they can, as people pay to avoid ads on Netflix, Spotify SPOT, and elsewhere. Roku said in early January when it released some preliminary Q4 results, that it added 14 million, or 38% more active accounts in 2020 to end the year with 51.2 million—its streaming hours climbed 55%.
Wall Street has loved ROKU stock, with it up nearly 940% in the last three years. This run includes a 230% jump in the past 12 months and a 30% climb in the last month alone. As of Tuesday afternoon, ROKU sat about 5% off its January highs at around $418 a share.
Despite the huge run, the stock is not currently overbought in terms of the Relative Strength Index, with Roku resting at about 61—an RSI above 70 is often regarded as overbought, with any number below 30 considered oversold.
Looking back, Roku’s 2019 sales surged 52% to $1.13 billion, with its ad-heavy and subscription-focused platform sales up 78% to $741 million. Zacks estimates call for its fourth quarter revenue to climb 50% to $615.8 million, which is projected to help cut its adjusted loss from -$0.13 to -$0.08.
The company’s fiscal 2020 revenue projected to pop 55% to $1.75 billion to top last year’s growth and FY18’s 45%. Peeking ahead, its 2021 sales are expected to climb 37%, or $650 million above our current-year estimate.
Roku is projected to post a larger adjusted loss this year. Luckily, it’s expected to shrink its loss in FY21. Plus, the company’s overall earnings outlook has trended in the right direction and it crushed our bottom-line estimates last quarter to post surprise positive earnings of +$0.09 a share.
Roku currently earns a Zacks Rank #2 (Buy), along with an “A” grade for Growth and a “B” for Momentum in our Style Scores system. Analysts have also raced to up their price targets for the company that’s projected to release its Q4 results on February 11, although the firm has not officially made an announcement as to when it will release its earnings.
Roku is also trading at a 21.4X forward sales, which marks a big discount compared to other high-flyers such as Shopify’s SHOP 35X and Zoom’s ZM 42X. With this in mind, there could always be near-term selling amid what has been a wild last week for the market, especially if investors decide to take profits on the stock that’s up 230% over the past year.
Yet, those with a long-term view might want to take a chance on Roku for its ability to grow within the booming streaming TV market. And let’s not forget that the earnings season has been strong for S&P 500 and the broader tech space.
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