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Why Streaming TV Firm Roku Stock Looks Like a Buy at New Highs

Benjamin Rains

Shares of Roku ROKU soared nearly 9% Wednesday after Guggenheim analysts turned more bullish on the streaming TV company. Roku’s stock price has skyrocketed over 230% this year and it looks poised to benefit from the continued shift from linear-TV to streaming.

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Guggenheim analysts raised their price target on Roku stock from $75 per share to $119 per share. This marked roughly 28% upside compared to Tuesday’s closing price of $93.60.

The company also upgraded Roku to a “buy” from “neutral” on Wednesday. “We see continued growth in account and streaming metrics, closing of the video advertising pricing gap with traditional television, demand by third parties for audience development opportunities, and incremental content distribution revenue recognition as key catalysts for shares,” analyst Michael Morris wrote in a note to investors.

Roku Overview

Roku is one of the only pure-play video streaming companies out there aside from industry titan Netflix NFLX. The firm’s devices allow customers to watch streaming services such as Netflix, Hulu, Amazon Prime AMZN, HBO T, and others all in one place. The Los Gatos, California-based company currently boasts a larger market share than rivals like Apple TV AAPL, Amazon Fire TV, and Google’s GOOGL Chromecast, according to eMarketer.

The company’s branded smart TVs have also become widely popular. Roku has partnerships with Sharp, RCA, JVC, and more, and the firm estimated that more than one-in-three smart TVs sold in the U.S. during the first quarter of 2019 were Roku TVs. Plus, the firm has its own Roku Channel that allows users to watch free streaming movies and TV shows, which could become more popular as more people ditch cable.

The company sells advertising on the Roku Channel and has a marketplace that allows marketers to buy targeted ads. Roku’s ability to expand its ad business could prove huge. And this seems somewhat likely as the cord cutting-revolution makes consumers harder and harder to reach anywhere except Facebook FB, Google, or Amazon.

 

 

 

Roku is also likely to benefit from the entry of Disney DIS, AT&T, Apple, and NBCUniversal CMCSA, and others into the streaming TV market over the next year. For example, the firm’s Q1 platform revenue soared 79% year-over-year, “driven by broad-based strength across SVOD (subscription video on demand) and TVOD (transactional video on demand) distribution revenue shares, audience development revenue and video advertising sales,” the company wrote in its first-quarter earnings release. “Q1 monetized video ad impressions across the platform more than doubled, and we expect that trend to continue throughout 2019.”

As we can see, shares of Roku have been up and down since the firm went public in late September 2017. With that said, Roku stock has destroyed the S&P 500’s average over this stretch as well as streaming TV peer Netflix. Shares of Roku jumped roughly 8.5% through late afternoon trading Wednesday to hit a brand-new intraday trading high of $101.99 per share. Roku stock is now up roughly 233% YTD.

Outlook

Roku is coming off a first quarter of fiscal 2019 that saw it report an adjusted loss of $0.09 per share. This came in below Q1 2018’s $0.07 per share loss, but crushed our Zacks Consensus Estimate that called for a loss of $0.24 a share. Meanwhile, the firm’s Q1 revenue surged 51% to reach $206.7 million and crush our estimate that called for 38.4% top-line expansion.

Looking ahead, our current Zacks Consensus Estimate calls for Roku’s Q2 2019 revenue to jump 43.3% to $224.8 million. The company’s full-year revenue is then projected to climb 39.7% from $742.5 million in 2018 to $1.04 billion. These estimates clearly represent a slowdown from Q1, but we should remember that Roku easily topped our estimate.  

At the bottom end of the income statement, Roku is projected to post an adjusted full-year loss of -$0.60 per share. This would mark a massive downturn from 2018, but once again the company posted a much lower-than-projected loss in Q1. Plus, Roku has surpassed our quarterly earnings estimate by an average of 86% over the trailing four periods. And Roku’s earnings are projected to climb by 19% over the next three to five years on an annualized basis.

Bottom Line

Roku is clearly in its growth phase and management has committed to international expansion, of which it is still in the early stages. Global expansion will be key because Roku executives have said that active account growth will be one of the most significant long-term drivers of profit and loss.

The firm’s ability to grow its advertising business is also likely to play a key roll as streaming video expands. Roku is currently a Zacks Rank #1 (Strong Buy), based, in large part, on its positive longer-term earnings estimate revision activity. Roku is certainly a growth stock to consider buying right now that helps investors add exposure to the booming streaming TV market. With that said, some might want to wait for a pullback from Roku’s new highs.

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