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Roku Stock Is a Great Long-Term Buy for 5 Big Reasons

Despite being levered to the streaming TV trend — which has received a boost during the coronavirus pandemic with consumers stuck at home — shares of streaming device maker Roku (NASDAQ:ROKU) have plunged over the past six weeks on concerns that the company’s ad business will be materially impacted as the global ad industry dries up.

Here's How the Roku Stock Retreat Has Created a Good Buying Opportunity
Source: Shutterstock

ROKU stock presently trades more than 40% off of mid-February highs. While the ad concerns ostensibly make sense, the sell-off seems overdone, both for now and in the long-term. And closing last week at $80, ROKU stock looks awfully compelling.

With that in mind, here’s five big reasons I’m bullish on ROKU stock on the dip:

  1. Base case for the coronavirus pandemic is economic normalization by summer. Current modeling and trends suggest that the coronavirus pandemic will peak within the next 1-2 weeks, before slowly fading thereafter. As the pandemic fades, the economy will gradually normalize.
  2. Record high engagement in the second quarter of 2020, will lead to record high ad sales in the second half of 2020. Roku is presumably seeing record high engagement in the second quarter of 2020, and this lays the foundation for the company to net record high ad sales once ad spending trends normalize in the back-half of the year.
  3. Shift from linear to connected TV advertising could accelerate in the aftermath of this pandemic. For various reasons, one of the coronavirus pandemic’s lasting impacts could be an acceleration in the shift from linear to connected TV — both on the user front and the advertising front.
  4. Long-term growth prospects remain robust. Roku is still a $10 billion company disrupting a $140 billion linear TV advertising industry, with strong gross margins, tons of momentum, and a big moat.
  5. Roku stock is undervalued. My updated modeling suggests that ROKU stock could finish the year around $120.

The Coronavirus Pandemic is Temporary

Although big, scary, and volatile, the coronavirus pandemic is also temporary. Current modeling — based on how the virus has progressed in various countries which have instituted social distancing — suggests that the pandemic will peak in mid-April. Spread will subsequently slow. Near-zero transmission is possible by May or early June.

Thereafter, the economy will normalize.

With respect to Roku, that means that consumer spending trends should gradually start to rebound in May, and pick-up stream in the third quarter. As consumer spending trends rebound, advertisers will re-up their budgets, and the advertising industry from which Roku draws most of its revenue will resume its upward trend in the summer.

Record High Sales Coming Soon

Presumably, Roku is seeing record high engagement today, given that consumers are cooped up at home and watching more Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) Video, and Disney (NYSE:DIS) Plus than usual — all of which can be streamed through Roku.

The problem with that is Roku can’t turn that record high engagement into extra revenue, because advertisers are curtailing ad spend. This problem won’t last long.

Ad dollars follow engagement. When ad spending trends rebound in the second half of 2020, then, Roku will turn record high engagement into record high sales, as advertisers pour into the platform to chase engagement. Such record high sales should help spark a rebound in ROKU stock.

Accelerated Shift to Connected TV

I do not expect the coronavirus pandemic to have that many long-term consumer impacts. However, one such long-term impact which I do see emerging from this crisis is an acceleration in the connected TV shift.

That is, the pandemic has served as a catalyst for the world to get on streaming services. If you weren’t signed up before, chances are you’re on one now, because streaming TV is one of the best forms of at-home entertainment.

Consequently, this crisis will likely accelerate the consumer shift from watching linear TV, to watching streaming TV. Because ad dollars follow engagement, coming out of this crisis, we will see an acceleration in the general market shift from advertising on linear TV to advertising on streaming TV.

That’s great news for Roku.

Long-Term Growth Prospects Remain Robust

Roku’s long-term outlook as a leading connected TV advertiser is still solid.

The global linear TV advertising market is approximately $140 billion. In pursuit of shifting consumption, a significant portion of that $140 billion linear TV ad budget will make its way into the streaming TV world over the next several years. In connected TV advertising, Roku is one of three major players, alongside Hulu and YouTube (NASDAQ:GOOG,NASDAQ:GOOGL).

Given the company’s already huge user base, and the low barriers to consumer adoption (plug-and-play hardware, plus an intuitive software interface), it is very likely that Roku will stay one of the relevant powers in connected TV advertising for many years to come.

Net net, Roku still projects as a leader in a connected TV advertising market which could measure $50 billion, $60 billion, or $70 billion-plus within the next decade, meaning this company still has hugely favorable long-term growth prospects.

Roku is Undervalued

Because of the coronavirus disruption, I’ve materially lowered my fiscal 2020 estimates for Roku. However, because I actually see the coronavirus accelerating the trends underlying Roku’s long-term growth narrative, I’ve only fractionally lowered those estimates.

At the start of the year, I was looking for Roku to net $15 in earnings per share by 2030. I’ve revised that estimate lower to $14.

Still, if Roku can do $14 in earnings per share by 2030, then this stock is materially undervalued today. Based on a 20-times exit multiple and a 10% discount rate, that implies a 2020 price target for ROKU stock of nearly $120.

Bottom Line on ROKU Stock

Roku is a long-term winner that is going through a near-term rough patch. This rough patch will pass. When it does, the connected TV advertising growth narrative will resume with full firepower. Roku’s growth trajectory will re-accelerate. And ROKU stock will bounce back.

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 rated one of the world’s top stock pickers 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, NFLX, and AMZN.

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/roku-stock-is-a-great-long-term-buy-for-5-big-reasons/.

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