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Why Deutsche Bank is bullish on Roku

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On Wednesday, Deutsche Bank initiated coverage of Roku with a buy and $185 price target, noting that Roku is the market leader in the connected TV (CTV) market. Looking ahead, the firm believes ad-supported TV and The Roku Channel are key to Rroku’s business model. The Final Round panel discusses the bullish call.

Video Transcript

MYLES UDLAND: Today, we're talking about Deutsche Bank's latest note on shares of Roku, the firm initiating coverage of the stock with a buy rating and a $185 price target. Roku, a company that has seen a huge run during this quarantine period, I guess we could-- I think it's fair to include them in the at-home trade. Of course, they make the small streaming devices that so many people use to access all of their different platforms.

But Dan Roberts, interesting here, Deutsche Bank really bullish, as-- as many analysts have been. But interesting during this time to be bullish on the ad supported side of Roku's business, the ad platform, the ad exchange that they run, considering almost every major media company has told us how soft the ad market has been over the last quarter.

DAN ROBERTS: Well, not only that about the ad market, but let's remember too that there's a little bit of a dark cloud overhanging all these devices. That isn't as talked about in this note, and maybe it's still a while off, but the idea that eventually when connect-- when TVs that come pre-loaded with all the different streaming apps become more ubiquitous, once everyone gets a new TV, these separate devices will be in trouble. Now, of course, Roku can also exist on an app on TVs that houses other apps.

But you're starting to see some of those TV makers make direct deals with other apps to come loaded with all this stuff. So soon enough, you won't need a separate device plugged into your TV. But for now, it's the number one connected TV device.

And this note reader, it's at 43 million people. It has the number one install base, which is interesting, because I think there are still some people who think that Apple TV is still the top device in terms of install base. That is not the case.

But you're right. The whole point here is ads. The whole point is ad sales on Roku. That's been the reason for bullishness, what, for the last year or two with Roku stock. We've seen so many upgrades. The stock has done very, very well.

Now, that said, the Roku kind of ad buying, and the appeal of Roku and its ability to sell ads both on its Roku home screen to other apps and they sell prominent placement, but also, Roku sells ad-- ads for things on its own Roku channel, there's a Roku channel that has its own shows, that strength has been the cause of a lot of bullishness, but it's also the reason that you don't see the two newest, most primo streaming apps on Roku devices or on Amazon Fire devices, and that is Peacock and HBO Max.

The reason is twofold. It's money, obviously, those companies complaining that Roku wants too much money. But also, it's a disagreement over selling ads, because Peacock and Comcast, they don't like how much control Roku has over the ads it sells on its platform when it's hosting other TV apps. So all this is just to say, I mean, Roku has done very well. The stock has done well. There's reason for bullishness.

For a long time now people have thought it could be an acquisition target. But the idea of those big strengths being selling ads, A, that's becoming more of a problem. Some other new TV apps don't like that. And then what happens when we no longer need those separate TV devices?

MYLES UDLAND: But I think, and Seana, I think, you know, Deutsche Bank notes-- they say right in the headline, price of admission is high for this stock, but there have really been no companies that have gotten to the aggregator-type scale that Roku is at in terms of being the funnel, the neutral party, the Switzerland, if you will, for all these different platforms that have failed in that pursuit. So there have been disagreements between Netflix and others over time, but ultimately, everybody carries Netflix, and everyone reaches a deal. And it would seem that Roku is likely in position to do the same because yes, they want to run their own ad platform, but if you're the largest installed based streaming service, Peacock can't justify not being on Roku, for example.

SEANA SMITH: Yeah, I think you're right there. And what Dan said, the 43 million installed base obviously shows the strength and the power that Roku has right now. And I think that's a big reason why Deutsche Bank, and many others on the street-- remember that Deutsche Bank isn't the only company that's raised its price target after Roku reported earnings.

We also heard from Susquehanna and Needham both having $185 price targeted stock, Needham actually $190. So a lot of these Wall Street firms think that this company has room to run. And the big thing here, and the thing that got my attention in this Deutsche Bank note, was the fact that they were saying that Roku is no longer considered a hardware company.

And they're talking about the success that the company has had from transitioning from the lower margin hardware business, strictly that, to its higher margin software and medium business, and comparing the company to where it is now to where it was when it IPOed three years ago. I mean, it's significantly different when you look at where the revenue is coming from. As it stands right now, less than 30% of its revenue is coming from the sales of its devices versus over half of it three years ago. And now the bulk of it is coming from its platform business.

So we talk about the shift that we're seeing from advertisers, the fact that they are favoring these connected TVs or streaming platforms rather than traditional TV. There's obviously is a lot of runway and room for growth within this space. I mean, taking a look at some of the estimates out there, I think one of them was that the US ad spending here for connected TV is expected to double over the next three years from what it is currently at $8 billion to over $16 billion.

So when you take those numbers into account and the success that these companies have-- has had already over the last couple of years, the runway with more people cutting the cord, with more people favoring these connected TVs or smart TVs, there's obviously more companies are going to be advertising on these platforms. So just making it very simple and making that the actual argument there, yeah, obviously it makes sense there's going to be more eyeballs on these platforms that your-- you can easily track. So why wouldn't you advertise on a streaming platform or on a Roku connected device rather than traditional TV? It simply does make sense.

MYLES UDLAND: And it does. And again, stock that has gone from about $20 three years ago to $150 today, so has been quite a winner, not just during the pandemic, but for some time before that.