Stock Analysis & Ideas

Can Innovation Save Roku (NASDAQ:ROKU) Stock?

Story Highlights

Roku stock is stuck in the gutter, but the bulls, like Cathie Wood, continue to stand by the name in such a trying moment. Though catalysts are few and far between, I wouldn’t underestimate the firm’s ability to innovate its way to a higher multiple.

Shares of video-streaming platform provider Roku (NASDAQ: ROKU) have been punished severely amid the recent tech wreck, now near 52-week lows. Though pressures are mounting from all ends, the company remains one of Cathie Wood’s favorite companies, and for good reason. It’s one of the “spiciest” and most innovation-focused streaming companies. At the end of the day, I do think innovation is how Roku will rise out of the rubble of its historic sell-off.

While I have no idea when the sell-off will conclude, Roku stock is starting to get cheap relative to its turnaround potential. For that reason, I am turning bullish on the stock.

Can Roku Give Its Ecosystem a Jolt?

Roku has steadily built an ecosystem for itself over the years. Its streaming stick is still widely used in spite of intensifying competition from big-tech rivals like Amazon (NASDAQ: AMZN). To prevent its ecosystem from withering away over time, though, Roku needs to give its ecosystem a jolt with features that can differentiate it from its peers.

Streaming hardware is mostly commoditized these days, but let’s not forget that Roku was one of the early-day pioneers in helping consumers transform their dumb TVs into smart ones.

Now that almost everyone has streaming enabled on their TV sets, questions linger as to what the next frontier will be. Roku’s push into content creation, with Roku Channel exclusives, is intriguing. However, the non-stop spending does not seem to be the cure to Roku’s ailments. Getting into streaming is costly. Roku needs another angle if it’s to out-innovate its peers and become a more relevant player in the increasingly crowded streaming space.

In a prior piece, I noted that Roku was at a huge disadvantage to its content-creating peers and that it would look far better for the firm to butter itself up to become a more enticing takeover target.

Though Roku may not have a wide moat surrounding its users, the firm’s innovative capabilities can help it steer through industry headwinds. Like it or not, Roku has an ecosystem. It just needs to make the most of its large user base before smart TVs can outsmart Roku hardware.

Are Cathie Wood’s Sky-High Hopes Really That Far-Fetched?

Despite the catastrophic implosion in shares of Roku, Cathie Wood sees a nice bounce-back in store for the former high-flyer. Not only does Wood see Roku recovering to its highs, it sees Roku stock overshooting to $605 in five years. Clearly, Wood sees more than just a troubled streaming-hardware maker.

Unless Roku can turn the ship around in an AMD-like (NASDAQ: AMD) fashion, such a $605 target seems ridiculous. That implies that shares would be almost 10x higher than current levels. For reference, the Street-high target of Roku stock is pinned at $130 per share — implying a 90% gain over the medium term.

Competition is incredibly fierce, and Roku is vulnerable going into a streaming slowdown. It’s not a mystery as to why most Wall Street analysts have been downgrading the stock from left, right, and center. So, how can Roku change the tides?

Perhaps Roku should unleash the Roku Channel and make it readily available to a wider range of consumers, including those that don’t use Roku devices. At the end of the day, Roku needs to move beyond the hardware game if it’s to thrive. Recent markdowns of Roku devices may help the firm increase its user count going into a recession. That said, Roku needs to have a plan for when growth inevitably grinds to a slowdown.

Roku Stock Cheap as Streaming Embraces Ads

At 3.1x sales, Roku seems cheap, even as a content underdog. As the company doubles down on ad-based content, there’s definitely room for Roku to edge out its rivals. Everybody in streaming seems to be targeting ad-supported streaming these days. When it comes to ads, Roku may have an opportunity to target users more effectively with algorithms that know what a user would be interested in based on what they watch.

Indeed, ads are the new frontier for the video-streaming space, and Roku has the talent to create data-driven algorithms that can help it regain a higher multiple.

The “Roku Recommends” program is an intriguing show that leverages Roku data to help users discover what to watch next. Indeed, enhanced algorithms and hit shows could be the forces that entice Roku users to give the Roku Channel a second look.

What is Roku Stock’s Price Target?

Turning to Wall Street, ROKU stock comes in as a Moderate Buy. Out of 22 analyst ratings, there are 12 Buys, four Holds, and six Sell recommendations.

The average Roku price target is $81.43, implying upside potential of 19.2%. Analyst price targets range from a low of $55.00 per share to a high of $130.00 per share.

Conclusion: Roku Looks Undervalued Despite Heavy Competition

Though competition is fierce, I do think Roku stock is undervalued after shedding a vast majority of its value from peak to trough. Roku Channel is likely to evolve into a major growth driver, moving forward. Looking ahead, I expect original content and data-driven innovations to help Roku regain its innovative appeal again.

Disclosure

Tired of arriving late to the Big Returns Party?​
Most investors don’t have major gainers like TSLA or NVDA on their radar from the start.
The profusion of opinions on social media and financial blogs makes it impossible to distinguish between real growth potential and pure hype.
​​For the past decade, we have developed and perfected technology designed to help private investors, just like you, find the best opportunities, with the greatest upside potential, in any financial climate.​
Learn More
Videos