Roku (NASDAQ:ROKU) stock has been on fire in 2019. The streaming-device maker proved with strong holiday-quarter numbers in early 2019 that this company is successfully fending off competition and executing on its long-term growth strategy.
Investors, who doubted that this was happening in late 2018, have been celebrating the strong numbers ever since. Year-to-date, Roku stock is up more than 100%.
The rally of Roku stock hit some turbulence in early March, mostly because Roku Inc stock had come very far, very fast, and was hit with downgrades by a pair of analysts. That sparked some profit-taking in Roku stock, but not too much profit-taking. ROKU only dropped about 15%, found its footing within a few days, and has since recovered.
The recovery of Roku stock will last for three reasons.
For starters, the company’s fundamentals continue to improve, most recently highlighted by Apple (NASDAQ:AAPL) partnering with ROKU on the former’s new streaming service. The technicals of Roku stock are also healthy, as this recovery started with a successful test and hold of a critical technical- support level. Further, the valuation of Roku stock remains reasonable, and the fundamentals of the stock support upside to $75 in 2019.
Overall, the fundamentals, technicals, and valuation of Roku Inc stock all remain healthy. As a result, this recovery rally of Roku stock should last for the foreseeable future.
The Company’s Fundamentals Are Only Getting Better
Roku stock is a long-term winner powered by non-cyclical growth tailwinds throughout the global streaming-video world.
More consumers than ever are pivoting to the streaming-video channel. Indeed, the number of streaming-video subs in the world is expected to more than double over the next several years. Concurrently, more entertainment companies than ever are pivoting to the streaming-video channel, too, and the number of streaming-video services will increase well over 100% over the next several years.
As the supply and demand of this industry rise, the need for a centralized, access-and-curation, streaming- video hub will likewise go up. Suppliers need such a hub to reach an increasingly large and diverse consumer base; consumers need that same hub to access an increasingly large and diverse supply of streaming services. As a result, the need for and value of a centralized, access-and-curation streaming-video hub will only grow over time (think of it as a cable box for streaming-video services).
Right now, with nearly 30 million active accounts, Roku has a head start in becoming that hugely important centralized, access-and-curation, streaming-video marketplace. That head start has given Roku a huge lead, and that lead is only getting bigger.
One of Roku’s biggest competitors, Apple (NASDAQ:AAPL), is using ROKU to launch its streaming service. In other words, a competitor is saying that it needs Roku to maximize its reach and distribution. That’s a pretty strong sign that ROKU is becoming increasingly necessary and important in the streaming-video world.
As a result, the long-term bull thesis on Roku stock remains as favorable today as it’s ever been. As long as the fundamentals of ROKU continue to improve (and they should), Roku Inc stock should stay on an uptrend.
The Technicals Look Goods
Beyond the fundamentals, the technicals look good for Roku stock, too.
Specifically, during the early March selloff, I told investors to watch the $60 level. That was where Roku’s 20-day moving average sat, and it served as the first line of technical defense for ROKU during its early March selloff. The logic was that if Roku stock held that level, it would be a sign that the uptrend remained intact.
Roku stock did hold that level. It dropped to $60, tested the 20-day moving average, held the 20-day moving average, and has since recovered strongly, despite some macroeconomic noise, i.e, the inverted yield curve. This strong recovery rally after holding a key technical support level, and in the face of macroeconomic headwinds, is a strong sign that Roku stock’s uptrend remains intact.
The Valuation of Roku Stock Is Reasonable
Importantly, Roku Inc stock remains reasonably valued today, and the company’s fundamentals are strong enough to propel it to $75 in fiscal 2019.
ROKU is still a relatively small company that’s attacking a huge market (there will be nearly 800 million streaming-video subscribers globally by 2023). It has a big lead in that market (ROKU has a nearly 40% share of the video-streaming device market) and rapid growth that refuses to slow down (its user growth is consistently north of 40% and its average revenue per user consistently increases more than 30%). Its gross margins are also sky-high, and its operating-spending rates are rapidly falling.
As a result, given the company’s early lead in the rapidly growing video-streaming market, it’s not too hard to see Roku as a 100-million-plus user platform one day, with $30-plus ARPU, 70%-plus gross margins, and a sub-40% operating-spending rate. Modeling that out, I think Roku can net around $4 of earnings per share by fiscal 2025. Based on a forward price-earnings multiple of 30, which is appropriate given Roku’s rapid growth, that equates to a fiscal 2024 price target for Roku stock of $120. Discounted back by 10% per year, that implies a fiscal 2019 price target for Roku Inc stock of $75.
The Bottom Line on Roku Inc Stock
Roku stock is a long-term winner that hit a rough patch in early March, and has since recovered. This recovery will last because the fundamentals, technicals, and valuation of ROKU all support further gains by Roku stock.
As of this writing, Luke Lango was long ROKU and AAPL.
