The last time I mentioned Roku (NASDAQ:ROKU), I said the pullback was nothing more than an overreaction, and ignoring ROKU now could be a big mistake later.
“For one, it appears investors once again overreacted to Comcast’s news. Two, with sizable growth prospects and plenty of bullish analysts, it’s tough to argue for further downside. With patience, I expect ROKU stock to resume its powerful uptrend, especially as consumers clamor for even more streaming TV programming,” I noted.
Immediately, ROKU rallied from a low of $127.81 to a high of $168.85 more than a month later. Since then, it has pulled back to $136.25 — but is still one of the top stocks to consider for 2020.
Consumers Are Clamoring for Streaming Programs
As cord-cutting consumers are becoming more ingrained into society, Roku and other streaming services are reaping the benefits.
For example, Comcast (NASDAQ:CMCSA) just lost 238,000 TV customers in the third quarter of 2019, as people opt for cheaper streaming services. Additionally, streaming just surpassed pay television for the first time — with up to 69% of households now having a subscription to a streaming video service.
According to PwC, “Consumers are willing to spend more to get the content they want, which is good news for brands launching new streaming services. Half of all consumers surveyed indicated some level of interest in subscribing to at least one of the new video services to be launched in the next 6-12 months.”
That’s creating even more opportunity for industry leaders, like ROKU. As consumers flock to streaming services, media companies like Disney (NYSE:DIS) are quickly following, and launching new programming. As that happens, ROKU benefits because its digital media players allow those two parties to connect to one another.
ROKU Analysts Are Setting Their Targets Higher
ROKU stock took a hit earlier this month after Morgan Stanley’s Benjamin Swinburne downgraded the stock from “equal-weight” to “underweight.” He argued that Roku’s “valuation has blown past not only other digital media competitors, but also high-growth software-as-a-service companies with healthier margins.” However, the firm is still bullish, boosting its price target on ROKU from $100 to $110.
Macquarie analyst Tim Nollen says the company can reach 72 million active accounts in the next three years from the 30 million accounts in the second quarter of 2019. Nollen also raised his price target on ROKU stock to $130 a share.
Needham analyst Laura Martin also raised her price target on the stock to from $150 to $200. She recommended buying the dip and was upbeat about the company’s potential to benefit from new streaming services from AT&T (NYSE:T) and Comcast.
“In 2020, Roku’s key upside valuation driver will be accelerating subscription [streaming-video-on-demand] revenues, which lowers investment risk, we believe,” she noted. “Additionally, Disney+, Apple+, Peacock/CMCSA and HBOMax/AT&T should accelerate customer acquisition spending, and Roku is a key beneficiary owing to its installed base of 32 million US connected-TV homes.”
There Are 32.2 Million Reasons to Get Excited About Growth
In the most recent quarter, ROKU reported 32.3 million active accounts — which is up from 30.5 million quarter over quarter. Average revenue per user came in at $22.58, as compared to $21.06 in the previous quarter, as well. In addition, the company is expanding in the North and South American markets, and expects to launch products in the U.K. by 2020.
While there are competitive headwinds from Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX), ROKU is attracting industry heavyweights like Disney, AT&T, and NBC Universal. “We are excited, to say the least, about the coming services into OTT and believe that we are an essential platform for these new services,” said Scott Rosenberg, senior vice president and general manager of Roku’s platform business.
Over-the-top (OTT) stands for “over-the-top,” which refers to users going “over” a cable box to view movies and television content through the internet.
The Bottom Line on Roku Stock
Consumers are leaving cable in droves for streaming content. As media companies wake up to that fact, they’re churning out even more content. With the ability to bring these two masses together, Roku is the prime beneficiary.
Ignore those who tell you ROKU is an overvalued stock. In my opinion, buy the dips. Then, check back on the stock a year from now when it should be closer to $300.
As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.
