With a big assist from shelter-in-place directives, these are halcyon days for streaming entertainment equities and Roku (NASDAQ:ROKU) stock is participating in that trend.
The operator of a streaming television platform is up 20.22% year-to-date and higher by 176.49% off its March lows. While those are impressive statistics, Roku stock has also been rangebound for about two months. With growth names like Roku, particularly when buoyed by favorable fundamentals, listless trading can end in a heartbeat, delivering big upside in the process.
Supported by the slow, agonizing death of traditional (linear) television, Roku has the tailwinds to end 2020 higher by more than the 20% gain it’s sporting today. The fact that old school TV lost viewers at the height of the Covid-19 pandemic bodes well for the streaming industry.
“According to Roku, prime-time linear TV consumption in the US dropped 18% from mid-March to late April on a year over year basis,” notes ARK Investment Management.
Also good for Roku is the forecast that 18% of viewers in the crucial 18 to 34 age demographic will scrap cable subscriptions by the end of this year.
Relevant Roku Stock
The Roku model is enviable. It’s not involved in cost-intensive content production a la Netflix (NASDAQ:NFLX), but it’s something of a gatekeeper. This allows it to capitalize on the advertising shift from traditional TV.
In the market for set top boxes, a recent survey by Deutsche Bank indicates Roku has 43% share, an advantage of 800 basis points over rival Amazon (NASDAQ:AMZN). With favorable pricing, Roku is a hit with users among a variety of income levels, including those in the prime $100,000 a year and up range.
Roku is coming off a second quarter where revenue surged 41% and average revenue per user jumped 18% to almost $25. That average revenue per user figure is up from $23 last year. Citibank sees that number rising to $32 in 2022 with the value of each active Roku account swelling to $180 from $115 in 2019.
Those numbers along with Wall Street’s consensus price target of $160 on Roku stock, roughly where it closed on Aug. 28, could ultimately prove conservative due to forecasts highlighting the decline of linear TV. Currently, there are 86 million U.S. households with traditional cable subscriptions, but that number could dwindle to 44 million over the next five years, according to ARK.
Cord Cutting Carries the Day
The thing about disruptive themes is once they get going, they’re hard to stop. Linear TV is learning that the hard way.
Data suggest some cable customers canceled their plans when sports went dark for a Covid-19 shutdown in March. However, the NBA and NHL are in the midst of their playoff seasons and Major League Baseball recently started its 2020 campaign. Still, 17% of former cable subscribers aren’t renewing their plans.
That’s a boon for Roku because live sports has long been viewed as a hurdle for the streaming industry.
Even as some customers cling to cable, the stark reality is that the $70 billion U.S. TV advertising market is being disrupted. There’s no going back to the good old days. In the years ahead, those dollars will flow away from old guard TV to streaming, further bolstering the long-term thesis for Roku.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
