Buy Roku Stock Because This Company Is a Long-Term Winner

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Digital media company Roku (NASDAQ:ROKU) started October with a bang after a pair of analyst upgrades sent ROKU stock to fresh all time highs.

Needham maintained its “Buy” rating on Roku stock while upping the price target from $60 to $85, citing the company’s continued out-performance in a critical high-growth market. Meanwhile, Cannonball Research upped its price target on Roku stock to a Street-high $97 on expectations for continued robust growth in the ad business.

Overall, the pair of upgrades sent ROKU nearly 5% higher to fresh all time highs around $77. Is this breakout worth buying?

Absolutely. Roku stock is one of my favorite long-term investments. Recently, I wrote a piece on five stocks that represent the future of the digital economy. I dubbed the group of stocks STARS, and think each of them has FANG-like growth potential in a five to ten year to window.

What does the R in STARS stand for? Roku. Thanks to content-neutrality, low hardware price, easy-to-understand UI, widely compatible installation, and an early leadership position, Roku is optimally positioned to become the streaming industry’s “cable box.”

That position will ultimately command a premium valuation in a decade. Indeed, I see Roku’s valuation hitting $60 billion in the long run as streaming becomes the entertainment norm.

Today, Roku’s market cap is just $8 billion. As such, I see huge growth potential over the next several years, and believe Roku, alongside STARS, is a long-term winner.

Roku’s Addressable Market Is Huge

The world is shifting from linear to internet television. In the early stages of this transition, there were just a handful of streaming services like Netflix (NASDAQ:NFLX), Amazon’s (NASDAQ:AMZN) Prime Video, Google’s (NASDAQ:GOOG) YouTube and Hulu. But, now that the streaming market is starting to mature, the number of streaming services out there is starting to explode higher.

In other words, as the internet television market matures, it is starting to look more like the linear television market. Linear television has a bunch of channels. Internet television has a bunch of streaming services.

In the linear television world, consumers demanded a TV box to aggregate all those channels, put them in one spot and make it easy to navigate from channel to channel. The same thing is already happening in the streaming television world.

Consumers are demanding an OTT box to aggregate all the streaming services, put them in one spot and make it easy to navigate from streaming service to streaming service.

This is exactly what Roku does, and the market opportunity is anything but small.

The linear TV ad market measures $200 billion globally, and total media ad spending is growing at a 7% rate. Over time, all of those ad dollars will shift from linear TV to internet TV. In time, the internet TV ad market should measure more than $200 billion, and likely somewhere closer to $300 billion.

Moreover, global internet TV subs are expected to top 450 million by 2022, and likely hit 600 million or more in a decade. Assuming a $10 average monthly subscription, 600 million subs equates to a $72 billion annual revenue opportunity. Overall, then, Roku is attacking what will amount to a $400 billion annual revenue market.

Roku doesn’t need to capture a large share of that to justify its current $8 billion valuation. But, Roku will capture a big share of that market. As a result, Roku will be worth a lot more than $8 billion in the long haul.

Roku Has Distinct Advantages

Roku will capture a big portion of this market for one big reason: content neutrality.

Bears are persistently worried about competition. But, all of Roku’s big competitors, Amazon, Google, and Apple (NASDAQ:AAPL), either currently have or are trying to launch paid streaming services. Thus, they aren’t content neutral. They have competitive frictions that create conflicts of interest.

These conflicts of interest are bad for consumers. For example, it isn’t easy to stream Amazon Video through Google Chromecast. Likewise, it isn’t easy to stream Google Play movies through Amazon Fire TV Stick. But, on Roku, streaming Amazon Video, Google Play, and any other number of streaming services is as easy as a few clicks.

In other words, because Roku does not have a competing paid streaming service (the company operates a free, ad-supported streaming service that doesn’t compete directly for dollars with other paid streaming services), the platform has no conflicts of interest. Nor does the platform have any competitive friction with content providers.

It is content neutral. This content neutrality enables the smoothest over-the-top streaming aggregation experience, and that will ultimately differentiate Roku from the pack.

If anything, it already has. Roku controls nearly 40% of the OTT device market, and its share is up dramatically from two years ago. Roku’s numbers so far this year (nearly 50% active account growth last quarter) imply that the platform is only expanding its early leadership position.

Content neutrality is the biggest contributing factor to this early dominance. But, there are other factors at work, too. Such factors include Roku’s universal and easy-to-understand UI, the low price of the hardware, and the easy plug-and-play installation.

Bottom line on ROKU Stock

An important part of the STARS group, Roku stock is a long-term winner powered by secular growth tailwinds in the internet TV market. Given this company’s huge addressable market, distinct long-term advantages, and relatively small market cap, Roku stock has huge growth potential in a multi-year window.

I realistically see Roku stock growing by more than seven-fold over the next several years as the company morphs into the go-to “cable box” of the streaming industry.

As of this writing, Luke Lango was long ROKU, NFLX, AMZN, and GOOG. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/10/roku-stock-long-term-winner/.

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