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Ad Spend to Fuel Roku Stock in 2021; 5-Star Analyst Says ‘Buy’
Stock Analysis & Ideas

Ad Spend to Fuel Roku Stock in 2021; 5-Star Analyst Says ‘Buy’

COVID-19 has brought several trends to the fore that were already at play before the pandemic struck. Needham analyst Laura Martin believes one of them is good news for OTT leader Roku (ROKU).

“We believe that COVID-19 will accelerate ad spending shifts toward Connected TV (away from linear TV) as consumer spending and economic growth return,” the 5-star analyst commented.

But, first of all, Roku will have to navigate the pandemic’s ruinous effect.

Citing, “continued weakness in large digital ad categories such as autos, entertainment, and travel,” as growth depressors, Martin thinks the current quarter will represent the low point as far as COVID’s negative impact is concerned. Thereafter, as 2020 progresses, things should steadily improve.

Having said that, Martin believes the real turning point will be next year. As the economy fully reopens, marketers will need to be prudent with their budgets. This means they will seek ways to make the most out of limited resources. There is a clear beneficiary here.

Expounding on this, Martin stated, “This will encourage ad agencies and brands to look for alternatives with better targeting (Roku), lower prices (Roku) and better data feedback loops (Roku) compared to linear TV.”

Considering annual linear TV ad spending amounts to $70 billion, and Roku’s 2020 total ad revenue of roughly $777 million equates to just 1% market share, the potential is clear. Especially when you take into consideration Roku has “the largest reach of the connected TV market and is the largest 1-stop shop to buy ads on a connected TV platform.”

Furthermore, the fact that Roku’s ads use the same format as those of linear TV – 30 second spots – it requires minimal effort on the part of brands to “try Roku and/or add to their spending budgets on Roku.”

Lastly, Martin points out, “eMarketer now projects that brands will not commit up to $7 billion in the Upfront TV market.” This means the ad dollars “will enter the scatter market,” and could make their way to Roku between 4Q20 and 3Q21.

To this end, Martin reiterated a Buy recommendation on Roku along with a $150 price target. There’s 16% upside in the cards, should Martin’s target be met in the year ahead. (To watch Martin’s track record, click here)

Overall, the rest of the Street is cautiously optimistic when considering Roku’s prospects. Based on 8 Buys, 4 Holds and 2 Sells, the streaming player has a Moderate Buy consensus rating. Yet, the analysts’ average price target of $126.83 implies a modest downside from current levels. (See Roku stock-price forecast on TipRanks)

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