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Roku Stock: Streaming Underdog Has a Plan
Stock Analysis & Ideas

Roku Stock: Streaming Underdog Has a Plan

Shares of video-streaming and popular digital media creator Roku (ROKU) have felt no relief from its recent implosion. With selling pressure causing the stock to shed nearly 70% of its value from peak levels, it’s clear that expectations have been reset in a violent way.

As the firm moves on from media players towards original streaming content, Roku could evolve to become yet another video streamer for the likes of a Netflix (NFLX) to worry about.

Undoubtedly, the crown was always Netflix’s to lose. As companies continue funnelling considerable sums into original content production, I think that door is open for smaller, up-and-coming streamers to move in and give consumers something to talk about.

With an intriguing ad-based tier, which could be the way of the future for the streaming market, I am bullish on ROKU stock. I think it’s fallen too hard, too fast, with too many investors doubtful of the firm’s disruptive capabilities.

Video-Streaming Wars are Just Beginning

Undoubtedly, competition in streaming is fierce these days, with big tech firms flexing their financial muscles, pouring ample amounts of cash into the production of content.

When going up against Apple (AAPL) or Amazon (AMZN), two profoundly profitable companies that really don’t need their video-streaming divisions to make big profits over the near- to medium-term, it’s going to be really hard to stand one’s ground.

Indeed, Amazon is one of the disruptive firms that can spend money on new projects, even if such projects eat into margins.

Unlike Alphabet (GOOGL), which has been known to pull the plug on initiatives (the company previously pulled the plug on YouTube Originals) that don’t show early signs of success, Amazon is a firm that goes all out on markets in its sights.

If it means having to funnel more money in a project that’s expected to be a money-loser for years, Amazon is up for the task.

Amazon is arguably one of the most disruptive forces out there in the tech space. More importantly, it’s a firm that’s all about long-term market share gain. Unlike other firms, though, it’s willing to pay the price to achieve such a dominant position, even if it takes years.

As Amazon continues picking up traction in video streaming, I do think its rivals are in for quite the fight. Roku needs to show investors that its capital spending will pay off.

Undoubtedly, the stakes are higher for Roku than Amazon, but the potential rewards are too. It’s the classic case of higher risk for a shot at higher rewards.

Roku Stock: High Risk, Higher Rewards?

Roku can’t afford to see its streaming division in the red for a prolonged period as it ramps up on content spending, at least not compared to Amazon.

Although Roku is slated to spend north of $1 billion on content production for 2022, the company needs to intrigue users in an era where a growing number of firms are raising the bar on content spending.

While I’m not a fan of crossing paths with the likes of an Amazon or Apple, I do think that Roku can still hold its own against such hungry rivals.

Only time will tell.

Roku Channel Could Have Disruptive Impact

The ad-supported Roku Channel service could stand to benefit from increased usage from the around 155 million people who already have a Roku device. According to the Wall Street Journal, around half of Roku users actually use the Roku Channel. What about the other half?

They need a bit of a nudge to give Roku Channel a try. With no cost to them for giving the Roku Channel a look, I think the company has an enviable opportunity to “upsell” its existing userbase. What will it take to entice these folks?

Content that they’d be interested in. Roku is ready to spend money to generate such content. Who knows? The free tier of streaming may be more lucrative moving forward in an era where users don’t want to open up their wallets for yet another “plus” video-streaming subscription service.

Enter the next recession, and I do think ad-supported tiers are key to next-level growth in the streaming space.

Wall Street’s Take

According to TipRanks, ROKU stock comes in as a Strong Buy. Out of 17 analyst ratings, there are 15 Buy recommendations and two Sell recommendations.

The average Roku price target is $287.25, implying an upside of 89.1%. Analyst price targets range from a low of $136 per share to a high of $400 per share.

Bottom Line on Roku Stock

Roku is tough to get behind with the sheer negative momentum behind it. When Roku shares bottom is anyone’s guess. In any case, I am a fan of the company’s trajectory and think it’s a worthy challenger in streaming.

The stock trades at 8.6 times sales, which is not at all absurd for a firm of Roku’s caliber. The stakes are high, but Roku does have an opportunity to “upsell” existing customers with its free, ad-supported tier and beckon people away from pricey subscriptions.

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