Ever since the streaming device maker made its debut on Wall Street in September 2017, Roku (NASDAQ:ROKU) stock has been one of the market’s hottest stocks.
It’s IPO price? $14 per share.
The price tag today? Over $300.
That’s a whopping 2,040% return in just over three years, which is by all measures, insanely impressive.
On the heels of such a large rally, many investors are doubting that there’s much fuel left in the tank. After all, the average sell-side price target on Wall Street for ROKU stock is $250 — about 15% below today’s current price.
But such fears are grossly overblown and unnecessarily short-sighted. In the big picture, Roku is a $100 billion-plus company in the making thanks to the streaming TV revolution, and the ROKU stock price has visible runway toward $1,000 in the long run.
The implication? For long-term investors, ROKU stock is a buy-and-hold situation.
Here’s a deeper look at why.
All TV Ad Dollars Will Shift to Streaming TV
The first big component of the “ROKU stock to $1,000” bull thesis is that all TV ad dollars will eventually and inevitably migrate into the streaming channel.
The reasoning is simple.
Ad dollars chase eyeballs. All eyeballs are going from linear TV to streaming TV, because streaming TV offers superior convenience, pricing and connectivity. The only reason many of us still subscribe to linear TV is because streaming TV services historically have not featured live sports or news. But a new generation of streaming services — headlined by YouTube TV, Sling and fuboTV (NYSE:FUBO) — include this content.
Thus, over the next decade, we’re all going to cut the cord. By 2030, your average household will get all the movie and TV content they need from some mix of YouTube TV, Netflix, Disney+, etc.
As all the eyeballs in the world migrate from linear TV to streaming TV, all the TV ad dollars in the world will make a similar transition into streaming TV.
This is not a small transition. More than $160 billion are spent every year on TV advertising. All $160 billion of those dollars will eventually be spent in the streaming TV channel, because the linear TV channel will one day be extinct.
So, in essence, the Great CTV Ad Shift is a $150 billion-plus shift.
Roku Is Protected by Marketplace Effects
Roku has established a positive growth flywheel, which ensures that the company will forever remain the most commonly used “cable box” of CTV.
Roku is a marketplace that connects streaming services with consumers, and consumers with streaming services. As is true with any other marketplace, the core value prop of Roku to streaming services is to connect them with as many consumers possible, while the core value prop to consumers is to connect them to as many streaming services as possible.
With that in mind, here’s the growth flywheel that ensures dominance for Roku as the ubiquitous “cable box” of CTV for the foreseeable future.
- Create a big base of users.
- Leverage that base to attract streaming services looking for users.
- Use streaming service wins to attract more users looking for more streaming services.
- Lather. Rinse. Repeat. All the way to market dominance.
Breaking that down, Roku already is the biggest CTV software ecosystem on the planet, with nearly 50 million active accounts. So, if you’re a media company and you are launching a new streaming service, you are going to have to launch that streaming service through Roku.
Once you do that, Roku now has another streaming service in its library, which increases the attractiveness of the platform to users, so more users buy Roku sticks or TVs. That increases the size of the user base, so when the next media company launches a new streaming service, they are going to have launch that service through Roku.
Pretty simple, right?
So long as this growth flywheel continues to spin, Roku will remain at the epicenter of the great CTV ad spending shift — and ROKU stock will project as a long-term winner.
Roku Stock to $1,000?
The calculus for ROKU stock to hit $1,000 isn’t too hard to imagine.
Here’s the back-of-the-envelope math.
The number of streaming TV households globally is marching toward 450 million. Roku will likely close this year with around 50 million active accounts. Those numbers give Roku ~11% market share.
Roku’s market share of streaming TV households globally has been growing rapidly. It will continue to grow rapidly thanks to the aforementioned marketplace effects and general growth of streaming TV services.
But, for the sake of being conservative, let’s say Roku’s share tops out at 10%. Let’s also say that all $160 billion TV ad dollars migrate to streaming, and that Roku’s user market share translates one-to-one to the ad dollar market, for 10% streaming TV ad dollar share.
That would imply $16 billion in ad revenues by sometime in the next 10 to 15 years. Assuming 35% operating margins — which is pretty standard for scaled up digital ad businesses — that implies $5.6 billion in operating profits. Taking out 20% for taxes, you’re left with $4.5 billion in net profits, or about $33 per share based on last quarter’s diluted share count.
A 25X multiple on that implies a long-term price target for ROKU stock of $825.
That’s assuming just 10% streaming TV ad market share (a conservative assumption) and does not include any upside from the TV and device maker hardware business.
Adjusting those two things, it’s easy to see how ROKU stock could race toward $1,000 in the long run.
Bottom Line on ROKU Stock
Forget the near-term noise. Let’s make things simple.
Everybody is shifting from linear TV to streaming TV. Ad dollar chase eyeballs. So, all ad dollars are shifting to streaming TV, too. Roku is emerging as the foundational “cable box” of streaming TV, with very strong marketplace effects in place to protect its market-leading position. The company will win a big chunk of streaming TV ad dollars at scale.
Add it all up, and in numbers, you get to a $1,000 price tag for ROKU stock in the long run.
Thus, for long-term investors, this is a buy-on-dips and hold-for-the-long-haul situation.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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