Shares of Roku (ROKU) have jumped 22.5% in the past five days, buoyed by the buzz that Netflix (NFLX) could be interested in snapping up the connected-TV (CTV) player. These rumors were further fueled by Netflix’s plans to explore an ad-supported tier for its service.
Roku connects consumers with streaming services through its platform and takes a share of the advertising revenues generated from it. The company also has its own free app, which offers ad-supported movies and shows.
Recently, Needham analyst Laura Martin outlined the reasons why Roku could stand to benefit if Netflix adds an ad-supported tier to its service.
The analyst is of the view that the “streaming wars will be won by ad-driven business models” because “free” streaming always has the largest total addressable market (TAM). In such a scenario, Martin added that in the European Union (EU) and the United States, customers who “opt-in” for personalized ads will be the most valuable customers.
Moreover, Martin pointed out that the U.S. streaming market is at a mature stage, which means that reducing churn is extremely important for content streaming services. In order to minimize this churn, the analyst believes that “AdTech [advertising technology] is converging with streaming,” making advertising technology as important as content.
In such a scenario, the analyst believes that Roku, with its streaming driven 100% by ads and an “active installed base of >60mm US homes (ie, 50% of total US homes), with 100% opt-in [when it comes to targeted ads] from consumers,” the company “maximizes ad innovation.”
Martin is of the opinion that Roku is at an advantage in the streaming space with its focus on software leading to “first-to-market innovations.”
The analyst expects Roku to introduce “dynamic ad insertion for linear TV formats” in 2023 which would allow Roku “to serve more targeted ads for higher CPMs [cost per thousand] in real time (ie, scatter).”
Martin reiterated a bullish stance on the stock with a Buy rating and a price target of $205, implying an upside potential of 124.8% to current levels.
The analyst pointed out that as of March 30, Roku devices were installed in 60 million homes, reaching around 150 million consumers in the U.S. making the connected-TV player “the largest premium long-form film and TV content platform for CTV ads.”
Other analysts on the Street, however, are cautiously optimistic about the stock with a Moderate Buy consensus rating based on 17 Buys, five Holds, and one Sell. The average ROKU price target of $152.26 implies an upside potential of 66.8% at current levels.
Bottom Line
Roku seems all set to benefit from Netflix’s decision to go for an ad-supported tier. While Martin cited data from eMarketer that expects the CTV industry to grow at 40% in 2022, the analyst expects that this growth “should be faster for ROKU with its best-in-class data, and rev [revenue] upside from ad innovations, eCommerce and performance advters [advertisers].”
The stock also scores a 9 out of 10 on the TipRanks Smart Score system, which indicates that the stock is highly likely to outperform the market. The TipRanks Smart Score system is a data-driven, quantitative scoring system that analyses stocks on eight major parameters and comes up with a Smart Score ranging from 1 to 10. The higher the score, the more likely is the stock to outperform the market.
