Comcast (NASDAQ:CMCSA) threw down the gauntlet Sept. 18 when it announced its Xfinity internet subscribers would get Xfinity Flex, the company’s streaming box, for free. This little piece of news riled Roku (NASDAQ:ROKU) investors, sending ROKU stock down 22% over the remainder of the month.
Skeptics emerged, but the Roku stock price has recovered all of its losses, and then some, jumping 37% through October 17, a little more than halfway through the Halloween month.
Investors came to their senses this month, realizing that Comcast’s offer was nothing more than a desperate attempt to win some customers in the short term. Long term, Roku will take up the gauntlet and smash it into tiny little pieces.
Here’s why.
Agnostic Is the Way to Go
No, I’m not talking about religion here. I’m referring to the fact Roku will continue to gain subscribers because it’s the only genuinely agnostic streaming TV platform available. Yes, there are plenty of other TV streaming platforms that claim to be agnostic, but each of them has a financial owner or backer that has an agenda.
The same goes for each of the content providers such as Comcast’s NBCUniversal, Disney’s (NYSE:DIS) Disney+ and Hulu, and AT&T’s (NYSE:T) HBO Now.
I believe that as long as Roku remains a neutral participant in the ongoing streaming wars, it will continue to gain subscribers. Not just for the remainder of 2019, but in 2020 and beyond.
It appears I’m not the only one.
Macquarie upgraded ROKU stock to “outperform” from “neutral” while also raising its target price by $20 to $130. Currently trading above that 12-month target, I suspect it will increase it another $20 once Roku reports its Q3 2019 results on Nov. 6.
As it stands, Macquarie expects Roku to hit 72 million active accounts by 2022, more than double the 30.5 million it had at the end of the second quarter. Over the past four quarters, Roku’s added an average of 2.1 million active accounts per quarter. If it keeps up this pace, it will take 20 quarters to reach 72 million or Q2 2024.
However, that doesn’t take into account its international users, a subject I discussed in July.
“Roku’s operating system was built for TV, making it a much better experience. As it invests in international markets like Canada and elsewhere, manufacturers of TVs for sale outside the U.S. will gravitate to its operating system, “ I wrote July 5. “Internationally, Roku accounted for just 4% of the Smart TVs in 2018, leaving lots of fertile ground ahead.”
A sentiment that Macquarie analyst Ian Nollen mentioned as part of his company’s upgrade of Roku stock.
“We know little about the international roll-out plans, or costs beyond this year, which we assume will rise as marketing demands emerge,” said Macquarie analyst Tim Nollen. “Roku’s growth trajectory internationally could well echo that of Netflix’s (NASDAQ:NFLX), which has also tripled over the past 3 years.”
In case you haven’t noticed, Netflix’s international business has overtaken its U.S. business both in terms of paid memberships and revenue. Unless somebody comes up with something entirely different, and more importantly, better, I have a hard time seeing Roku faltering in the months and years ahead.
Can It Gain 37% in November?
There’s no question that the Macquarie upgrade helped Roku’s cause. To keep the momentum, a strong showing in the third quarter would undoubtedly do the trick. In Q3 2018, Roku added 1.8 million active accounts. In Q2 2019, it added 1.4 million active accounts. To jump another 37%, it will probably need a performance like Q4 2018, where it added 3.3 million active accounts.
Can it be done? I’m sure it could.
However, I wouldn’t bet the farm on a hunch. If you own Roku stock, a number between 1.4 million and 1.8 million is all that’s needed to keep the Roku thesis alive. Anything above that would be gravy.
However, Apple’s (NASDAQ:AAPL) TV app can now be downloaded to their devices. When Apple TV+ launches Nov. 1, Roku users will be able to view all of the streaming services’ new content for a small fee of $4.99 a month.
The buzz surrounding Apple TV+ could encourage new TV buyers to purchase Smart TVs equipped with Roku TV, adding to Roku’s user base.
Long-term, I like the idea of owning Roku stock. Short term, I doubt it will be able to deliver a second consecutive month with supersized gains, but stranger things have happened.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
