With shares of streaming device-maker Roku (ROKU) up 71% over the past year, and up 20-fold over the last five years, you might think that this stock’s success speaks for itself, and that Roku doesn’t need a any cheerleaders for it on Wall Street. Wall Street investment bank Needham, however, begs to differ.
Needham analyst Laura Martin doubled down on her Roku “buy” recommendation, and laid out her “top 10 Roku upside value drivers.” Here are the top 5 of her top 10 reasons to buy Roku as this $321 stock grows to $550 a share over the next year:
- Valuation upside. Martin argues that “YouTube is the best comp for Roku,” and that Roku “will look increasingly similar to YouTube over time.” If YouTube were an independent entity, its $40 billion in annual sales would “be worth about $450B if separately traded,” says Martin. And one way to look at that is that Roku will therefore one day be worth $450 billion.
- Walled Garden Economics. Martin says that “Walled Gardens maximize value capture [and] ROKU benefits from Walled Garden economics, driven by best-in-class first party viewing data… proprietary ad units, and a direct sales force.” As “better data leads to better ad targeting that leads to higher ad CPMs, which leads to rev acceleration, that leads to higher content investments, which leads to more viewing, which leads to better data, etc,” Martin expects Roku’s business to only get better and more profitable over time.
- TAM. Ordinarily, companies find a market, target the portion of it that they can address, and try to grab the biggest share of that Total Addressable Market before someone else snaps it up. In contrast, says Martin, “ROKU keeps expanding its TAM, which elongates its growth trajectory and maximizes LT valuation upside.” Simply put, Roku doesn’t just aim to grab a big piece of the pie — but to also grow the size of the pie — with the result that it may grow faster and longer than many investors expect.
- AVOD beats SVOD. There are two main ways to sell video on demand (VOD) in today’s world. One is by selling subscriptions to stream video (SVOD). The other is to provide free streaming videos, and make money selling ads to the people watching the videos — advertising-based video on demand (AVOD). In Martin’s opinion, AVOD is the way to go because “Economics 101 states that demand goes up as price falls. Therefore, free always wins if the target market is a mass audience.” AVOD “will be much larger than SVOD over time,” says the analyst, and Roku is the king of AVOD.
Q.E.D.
- Platform. Finally, Martin argues that Roku benefits from the “powerful synergies of an installed base of physical hardware purchased directly by consumers, coupled with proprietary software and services.” Because Roku makes the streaming equipment that its customers love, and become trained to use, Roku collects revenues from hardware sales, from customers using its services on that hardware, and from customers using other companies’ services to stream content on that hardware. And the more hardware Roku sells, the bigger its “power asymmetry” when negotiating with other companies that want to stream over its devices.
Most other analysts also take a bullish approach. ROKU’s Strong Buy consensus rating breaks down into 13 Buys, 2 Holds and a lone Sell. Additionally, the $475 average price target puts the upside potential at a ~57%. (See ROKU stock analysis on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
