Roku (NASDAQ:ROKU) is likely to benefit from a huge surge in viewership amid the outbreak of the coronavirus from China. Meanwhile, fears about the company losing ad revenue during the crisis are overdone. As a result, investors should buy Roku stock at its current levels.
Even people who aren’t experts on consumer behavior can figure out that TV viewership will jump tremendously thanks to social distancing. Most American consumers are now stuck at home, and when they aren’t working, they’ll be watching TV.
Moreover, one major TV genre — live sporting events — is almost completely unavailable. So, Roku will have less competition than before the crisis. And with tens of millions of consumers using Roku’s operating systems to stream Netflix (NASDAQ:NFLX), Roku is sure to benefit from this epic jump of TV viewership.
In a Feb. 26 note to investors, Needham analyst Laura Martin wrote that Roku would be a good defensive investment if more Americans stop going out. Since that scenario has played out in a big way, it is indeed reasonable to believe that Roku stock is a good buy now.
Worries About an Ad Slump Are Overdone
Two negative catalysts have likely prevented Roku stock from outperforming the market during the current crisis. First, Fox Corporation (NASDAQ:FOX) sold its 5% stake in Roku in order to acquire a much smaller streaming platform called Tubi. Secondly, Wall Street is worried that an advertising downturn will hit Roku hard.
Research firm Loop Capital, for example, upgraded Roku to “hold” from “sell,” primarily based on valuation. But the firm warned that advertising would likely decline. It’s unclear if Loop Capital was predicting that all advertising revenue would decline or if it meant that Roku’s ad revenue would fall.
But in any case, I believe that, for two reasons, the concerns about Roku’s advertising revenue are overdone. First, although some sectors of the economy have been decimated by the coronavirus outbreak, others are booming.
For example, grocery stores like Kroger (NYSE:KR) and delivery-oriented food companies like Domino’s (NYSE:DPZ) are booming. So in this new normal, Roku will get a large amount of ad revenue from such companies. That revenue won’t entirely make up for Roku’s typical sales. But, on the other hand, Roku’s ad sales shouldn’t drop more than 15% year-over-year.
Meanwhile, Roku’s commission revenue should jump. Specifically, the company gets a 20% cut of all the revenue from content ordered on its website. As viewership soars, Roku users will order more movies and try out more paid channels, meaningfully boosting the company’s commission revenue.
The increase in commission revenue will offset much of the ad revenue it will lose from the downturn.
The Bottom Line on Roku Stock
I continue to believe that Roku faces little competition when it comes to selling ads to companies looking for exposure to streaming TV users. I also still think that the company will benefit a great deal from ads from the many providers of streaming content, like Disney (NYSE:DIS) and Apple (NASDAQ:AAPL).
And, I still think that Roku will benefit from the rapid growth of streaming TV around the world. Given all of these points, Roku’s long-term outlook remains extremely upbeat.
Roku’s viewership is likely to jump tremendously during the coronavirus crisis. As a result, the companies who are benefitting from the pandemic will buy ads on Roku’s platform. Meanwhile, Roku’s revenue from commissions will jump as users buy more content. Finally, the company’s long-term future remains quite bright.
Given all of these points and the huge drop in Roku stock, medium-term and long-term investors should buy the company’s shares.
As of this writing, Larry Ramer owned shares of Roku stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer.
