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Wed, April 5 at 4:00PM ET

4 Big Reasons Roku Stock Will Continue to Run Toward $130

Roku (NASDAQ:ROKU) reported preliminary first-quarter numbers last week that were much better than expected, quelling fears that the novel coronavirus pandemic is killing the company’s advertising business. As a result Roku stock popped more than 10%.

4 Big Reasons Roku Stock Will Continue to Run Toward $130

Source: Michael Vi / Shutterstock.com

The pop extends what was already a big recovery rally in ROKU stock on the back of easing coronavirus headwinds. Shares are now up nearly 80% over the past month.

Zooming out, while the best of this rally has already happened, there’s still more upside left in ROKU stock. As such, for those who followed my advice and bought the dip in ROKU stock a month ago, I say “let your winners run.” This stock isn’t worth selling yet.

Here’s why:

  1. Roku is gaining exceptional momentum as the “cable box” of the streaming TV world amid the coronavirus outbreak. Social distancing is pushing a record number of users into the streaming TV world and onto Roku’s ecosystem. This big growth adds to the company’s already sizable moat.
  2. First quarter numbers confirm that connected TV ad spend remains robust, and that second quarter numbers will be much better than feared. Many feared that as advertisers cut budgets amid the coronavirus pandemic, Roku’s ad business would struggle. That’s not happening.
  3. Roku will turn record-high engagement today, into record-high sales and profits in the second half of 2020. Ad dollars follow engagement. As ad spending trends rebound in the second half of 2020, Roku’s already strong connected TV ad spending trends, will only gain momentum as more ad dollars chase Roku’s increasingly large user base.
  4. Long-term growth potential remains robust, and ROKU stock is undervalued until $130. My numbers suggest that Roku’s huge long-term profit growth potential in the connected TV world is not fully priced into ROKU stock until about $130.

Streaming TV and ROKU Stock

My long-term bull thesis on Roku has always been that this platform is turning into the “cable box” of streaming TV, aggregating and streamlining all the supply and demand in the industry so that the right consumers have friction-less access to the right streaming services.

This bull thesis is propped up on one big idea. Roku is the biggest streaming TV aggregator in the world.

That’s the moat. The bigger Roku gets, the more consumers are familiar with its ecosystem, which begets bigger user growth, since consumers like familiar user interfaces. Concurrently, the bigger Roku gets, the more streaming services have to use Roku as a distribution channel in order to reach consumers, and the more consumers in turn flock to the platform because Roku has all the streaming services.

In other words, because Roku is a streaming TV marketplace of sorts, network effects are very real, and big demand growth leads to more supply growth, which leads to more user growth.

Right now, Roku is on fire in terms of user growth. In the first quarter of 2020, the company grew its active account base by 37% year-over-year to nearly 40 million active accounts. This sustained huge growth positions the company to continue to expand its dominance as the “cable box” of the streaming TV world over the next few years.

Better-Than-Expected Ad Spending Trends

Roku’s first quarter revenues are expected to land somewhere around $312 million.

Not only is that better than both the prior guide ($305 million) and the consensus estimate ($300 million), but it also represents 51% year-over-year revenue growth, better than the fourth quarter’s 49% revenue growth rate. In other words, although Roku’s first quarter was impacted by one entire month (March) of coronavirus-impacted ad spend, Roku still managed to accelerate revenue growth in the quarter.

That’s impressive. It speaks to the strength of the underlying shift from linear to connected TV ad spend. Long story short, even though advertisers are pulling back on ad spend, they aren’t slowing their shift from linear to connected TV ad spend. If anything, they are accelerating that shift, and this acceleration is more than offsetting coronavirus-related ad budget cuts for Roku.

This dynamic will persist. That means second quarter numbers — which many expected to be awful — won’t be awful. Those numbers were widely considered to be the biggest downside catalyst on the horizon for ROKU stock. With that downside catalyst now largely mitigated, it looks like ROKU stock can and will keep running higher.

Record-High Engagement Today

What many investors seem to be forgetting is that ad dollars follow engagement.

Thus, once ad spending trends rebound in the back-half of 2020 as the economy normalizes, advertising platforms that are seeing record-high engagement today are in a great position to turn that record-high engagement into record-high sales.

Roku is no exception to this trend.

Roku is seeing record high engagement today. Nearly 40 million active accounts. Up 37% year-over-year. More than 13 billion viewing hours. Up 49% year-over-year. This robust engagement growth positions the company to see huge ad sales growth in the second-half of 2020.

Those strong second-half numbers should keep the current upward trend in ROKU stock alive for the foreseeable future.

More Upside Left

Roku is a long-term growth company. Thus, in order to properly value the stock, you have to look at where Roku’s profits will be in a decade.

My modeling suggests that robust active account growth coupled with an enormous shift from linear to connected TV ad spend and a strong gross margin profile, Roku has an opportunity to net $15 in earnings per share by 2030.

Based on a 20-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for ROKU stock of nearly $130.

The stock trades below $110 today, meaning this rally isn’t over just yet.

Bottom Line on ROKU Stock

ROKU stock is a long-term winner. The coronavirus pandemic is a near-term headwind. On that basis alone, near-term weakness is a great long-term buying opportunity in ROKU stock.

Even further, Roku isn’t being hurt that much by the coronavirus. Preliminary first quarter numbers imply that business is good. So, not only will Roku survive the coronavirus crisis, but the company will actually weather the storm much better than feared.

That’s all good news. The better news? The stock is still undervalued. Fundamentals point to upside to $130 over the next few months.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.  As of this writing, he was long ROKU.

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/4-big-reasons-roku-stock-run-130/.

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