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Roku’s Well-Deserved Gains Have Stretched the Valuation to the Limit, Says Analyst
Stock Analysis & Ideas

Roku’s Well-Deserved Gains Have Stretched the Valuation to the Limit, Says Analyst

Market watchers might be a bit confused by the overall reaction to Roku’s (ROKU) Q2 earnings results. The streaming pioneer delivered an estimate-beating report, coming in ahead of consensus on most key metrics.  

Roku was expected to report outsized additions of new accounts and extra viewing hours, with it delivering on both fronts. The COVID-19 effect in full effect.

However, Roku surprised investors with its advertising revenue. The positive results ate away at the pre-earnings narrative which implied COVID-19’s negative impact on ad budgets would result in reduced ad revenue. Wedbush analyst Michael Pachter was among those taken aback by Roku’s strong performance.

The 5-star analyst said, “Roku continued to gain market share in overall digital marketing in Q2, but we had estimated that lower CPMs would drive overall ARPU to decline sequentially. We were wrong. In fact, monetized video ad impressions were up 50% year-over-year in the quarter.”

Nevertheless, Roku shares tanked following the statement’s release, declining by 7% in the next day’s session. Essentially, investors were disappointed by Roku’s guidance. In fact, there was no guidance. Roku spooked investors by admitting the coronavirus is making it very difficult to estimate future revenue, and moreover, the company expects ad budgets to remain depressed well into next year.

The outlook has left Pachter with a dilemma. Along with the unexpected strong performance, the 5-star analyst expects Roku to continue gaining market share, driven by “greater growth in TVOD, licensed TVs, and Players.” Furthermore, the accelerated shift from linear TV to cord-cutting should result in “future expansion as ad spend is diverted from TV to OTT.”

These tailwinds result in a boost to the price target, which moves up from $136 to $160 and implies modest upside potential of 6%. That small upside is the counterpunch to Pachter’s positive assessment, as the 4-star analyst keeps his Neutral (i.e. Hold) rating because “Roku’s share price may remain volatile as expectations are elevated against a rich valuation.” (To watch Pachter’s track record, click here)

Roku is eliciting mixed reactions from the rest of the analyst community. Based on 8 Buys, 6 Holds and 2 Sells, Roku has a Moderate Buy consensus rating. The Street thinks the current valuation is just about right, and at $156.75, the average price target implies 4% upside potential. (See Roku stock-price forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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