After Being Range Bound for Too Long, Roku Stock Is Poised to Break Out

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Stuck in a narrow but consistent trading range, Roku (NASDAQ:ROKU) needs a positive catalyst to break-out from current levels. Roku stock traded at $150 for more than a month. It rallied briefly on Aug. 5 after the earnings announcement, only to fall.

ROKU Stock Will Continue Benefitting From the TCL Partnership

Source: Michael Vi / Shutterstock.com

Why did a jump in quarterly revenue not lead to a sustained rally?

Roku posted second-quarter revenue rising 41% year-on-year to $43 million. Streaming hours soared 65% to 14.6 billion. Average revenue rose by a modest 18% Y/Y to $24.92.

The exceptional growth rate would justify a rally in shares. Roku usually posts strong account increases during the holiday season. Customers usually buy televisions and Roku sticks in that period.

This time, the Covid-19 pandemic created an optimal environment for Roku’s streaming business. Platform and player revenue are up 46% and 35%, respectively.

The continued stay at home trends could increase audience growth rates. Plus, the extension for companies keeping employees working at home benefits Roku. Unfortunately, risks of the pandemic worsening this Fall during the flu season would also lift Roku’s audience count.

A Closer Look at ROKU Stock

Investors searching for a hedge against the pandemic should watch Roku. Zoom (NASDAQ:ZM), Microsoft (NASDAQ:MSFT), and DocuSign (NASDAQ:DOCU) are a few examples of software companies that will also grow in the quarters ahead if the pandemic rages on.

Uncertainties in the ad industry may limit Roku’s revenue potential in the second half of the year. On the conference call, Chief Financial Officer Steve Louden said that the company will remain committed to its strategic investment areas.

This will drive growth. So, as it manages its costs, it still expects operating expenses to grow. This will improve the company’s position when ad spending returns to pre-Covid-19 levels.

Roku expects to increase its headcount and spend on facilities. And although it forecasts and adjusted EBITDA loss for the year, these short-term investments will pay off in the long-run.

The OneView relaunch in the early part of the second quarter integrated Roku identity with data. This lets OneView users target and measure their campaigns. By optimizing performance, advertisers will get a higher return on investment.

SVP Scott Rosenberg said OneView gives “the ability to help a marketer optimize their campaign to bottom funnel results, like site visits or product purchases. And so that’s actually bringing in a class to performance advertisers.”

Roku is effectively winning advertisers who would have previously considered the traditional markets. This suggests that the company’s addressable market is expanding.

Valuation

There are 18 Wall Street analysts who offer a one-year price target on Roku stock. The average price target is ~$160 (per Tipranks). This suggests the stock has an upside of around 9%. On simplywall.st, the estimate of fair value is only $100. This bearish target is due to the company’s future revenue growth prospects.

Stock Rover Research noted that the short float percent is ~7%. Still, Roku has a history of beating analyst consensus estimates:

Surprise Type Announce Date Period End Date Actual Est. Surprise (%)
EPS EPS
Positive 8/5/2020 6/30/2020 ($0.35) ($0.55) 36.40%
In-Line 5/7/2020 3/31/2020 ($0.45) ($0.45) 0.00%
Positive 2/13/2020 12/31/2019 ($0.13) ($0.14) 7.10%
Positive 11/6/2019 9/30/2019 ($0.22) ($0.28) 21.40%

Data courtesy of Stock Rover

Given the sustained strength heading into the current (third) quarter, investors should expect Roku to beat expectations again. Active account growth is encouraging. And higher streaming hours accelerating sharply from pre-Covid-19 levels increases the value of the platform.

Given the strong viewing trends on the Roku platform, current advertising customers may increase their spending. With tools available to measure the returns on ad spend, advertisers may justify their return on investment. New advertisers will add Roku as a place to reach its intended audience.

Your Takeaway

Timing Roku’s break-out is impossible. The best thing investors may do is to continue holding the stock. Roku shares are locked in a trading pattern and is taking a breather for now. That pause will not last much longer.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/range-bound-roku-stock-poised-to-break-out/.

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