Those interested in the investment potential of streaming video may want to look at something other than a traditional streaming service. I’m talking about Roku (NASDAQ:ROKU).
This San Jose-based company is well-known as a leader in video streaming hardware. But Roku does more besides.
The company also operates its own digital video platform, including its own ad-supported channel. It licenses its operating system to TV manufacturers. And its recently begun selling wireless home theater speakers.
Roku stock was hard hit in March, like much of the market. But it’s since seen a nice recovery. And a recent analyst upgrade has boosted the stock further.
Roku looks pretty attractive at current levels — but it’s not without risk.
Roku Stock Pops on Analyst Upgrade
Although its shares were punished in March, Roku stock has seen some upside from the pandemic. In its Q2 earnings (which saw revenue up 42% year-over-year and gross profit up 29%), the company reported:
“Demand for our players increased following the start of shelter-at-home orders in mid-March. Despite the pandemic’s adverse impact on global supply chains, we have largely managed to keep our products in stock, albeit with a greater use of air freight than originally planned. Due to strong demand and tight inventory levels of certain products, we ran fewer promotions than we normally would which benefited player margins.”
Since diving below $84 at the worst of the March market, Roku stock topped $179 at the start of September. That’s a tidy 113% gain. Like many tech stocks, Roku shares have dipped since then, but the steep slide was halted by news of an analyst upgrade.
On September 8, Wells Fargo analyst Steven Cahall called Roku an “advertising heavyweight in the making” while setting a $215 price target.
Roku is Doing a Lot Of Things Right
Roku’s early focus was on selling video streaming hardware. Everything from inexpensive dongles that plug in to the back of a TV to more sophisticated set-top boxes. That business continues to do well, and in the U.S., Roku products are the most popular streaming devices — after smart TVs. In the latest quarter, revenue for video streamers was $111.3 million, an increase of 35% YoY.
However, several years ago Roku began to pivot, and that has resulted in considerable growth for Roku stock.
The company licensed its operating system to TV manufacturers. This meant there would no longer be any need for customers to buy a set-top streamer, so Roku would forgo those potential sales. However, by having the Roku TV platform built-in to new televisions, the company’s share of the streaming market increased.
Combined with its free, ad-supported channel, this would drive revenue outside of reliance on physical hardware sales. And that strategy has paid off.
In November 2017, a deal to sell Philips-branded TVs in the U.S. market with Roku TV onboard boosted Roku stock nearly 43%. In the first quarter of 2018, advertising and licensing revenue surpassed hardware sales for the first time.
This January, the company announced it had inked deals with 15 TV brands to release Roku TV models in North America and Europe. In its latest quarter, Roku reported platform revenue (ads and licensing) of $244.8 million, up 46% YoY. With more consumers signing onto its service via smart TVs, Roku also added 3.2 million additional active accounts during the quarter.
There Are Risks
Things are going well for Roku at the moment. But not well enough to make it an ‘A-rated’ stock in my Portfolio Grader. It’s a solid ‘B,’ but there are risks potential investors should be aware of.
The biggest risk is scale. For all its success, Roku is a relatively tiny company compared to the streaming competition. While competitors are signing licensing deals with premium TV brands, Roku TV is mostly found on lower price Chinese TV brands like TCL and Hisense.
Beyond that, big streaming services could reduce the attractiveness of Roku TV if they pulled their apps from its platform. Profitability continues to be a challenge. And while Roku is a dominant presence as a streaming platform in the U.S., for growth it needs to scale up and into international markets.
Bottom Line on Roku Stock
Thanks to the September tech stock dip, Roku shares are now below $160. That means a nice 34% upside if you agree with Wells Fargo’s take on Roku stock. Just be aware that while the Roku story — and Roku’s strategy pivot to be a platform not just a hardware seller — is playing out nicely, it’s not without risk.
On the date of publication, Louis Navellier had a long position in ROKU. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.